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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

|/x/                                          | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934    
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|For the Fiscal Year Ended: December 31, 2000
|OR                                          
|/ /                                          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number:000-28329

PREVIEW SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

770485517(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)1195 West Fremont Boulevard
Sunnyvale, California(Address of principal executive offices)

94087(Zip Code)


Registrant's
telephone number, including area code:408-720-3500

Securities
registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, $.0002 par value

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter 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 /x/ No / /

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 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 information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this
Form 10-K. / /

The
aggregate market value of the voting stock held by non-affiliates of the Registrant was $26,850,301 as of March 21, 2001, based upon the last sales price as
reported by the Nasdaq National Market System.

The
number of shares outstanding of the Registrant's common stock as of March 21, 2001 was 17,316,667 shares.

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Documents Incorporated by Reference

None.

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PREVIEW SYSTEMS, INC.    2000 FORM 10-K ANNUAL REPORT    TABLE OF CONTENTS

|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  | PART I                                                                                |  |     
|Item 1.    |  | Business                                                                              |  | 2   
|Item 2.    |  | Properties                                                                            |  | 22  
|Item 3.    |  | Legal Proceedings                                                                     |  | 22  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 22  
|           |  | PART II                                                                               |  |     
|Item 5.    |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 23  
|Item 6.    |  | Selected Financial Data                                                               |  | 23  
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 24  
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30  
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  | 31  
|Item 9.    |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  |  | 31  
|           |  | PART III                                                                              |  |     
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  | 32  
|Item 11.   |  | Executive Compensation                                                                |  | 36  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 39  
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  | 41  
|           |  | PART IV                                                                               |  |     
|Item 14.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 42  
|Signatures |  |                                                                                       |  | 45  

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Item 1. Business

Forward Looking Statements

This Form 10-K contains forward-looking statements that involve risks and uncertainties. We use words like "anticipate," "believe," "plan,"
"expect," "future," "intend," and similar expressions to identify forward-looking statements. This Form 10-K also contains forward-looking statements attributed to third parties
relating to their estimates regarding the growth of Internet use and electronic distribution and licensing of digital goods. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this Form 10-K. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including
the risks faced by us and described in our Registration Statement on Form S-1, in our Form 10-K for the year ended December 31, 1999 and our quarterly
reports on Form 10-Q, as filed with the Securities and Exchange Commission. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-K to conform these statements to actual results or to
changes in our expectations.

The Company

Preview Systems is a provider of an Internet-based infrastructure solution that enables networks for distribution and licensing of digital goods. Our solution
links software publishers and music labels to their channel partners and end-users worldwide, creating an end-to-end electronic distribution chain that manages the
e-commerce of digital goods and associated licensing rights.

Industry Overview

The rapid growth of Internet users, content and functionality is enabling complex business-to-business and
business-to-consumer communications and commerce. In December 2000, International Data Corporation reported that total worldwide Internet commerce spending in 1999 was
$131.5 billion and is
estimated to grow to $2.6 trillion in 2004, representing a compound annual growth rate of 82%. Much of this spending to date has been for products that were sold over the Internet and delivered to the
end customer in a physical form. As a result, the Internet has been primarily used as a sales and marketing channel. However, for digital goods, the Internet can also be a means for electronic
distribution and fulfillment. In addition, licensing rights can be separated from digital content, distributed and managed electronically and tailored to meet each customer's needs.

The Sale and Distribution of Digital Goods

Digital goods are characterized by two elements: digital content and associated licensing rights. Both digital content and licenses can be produced, stored and
distributed physically or electronically. Digital goods such as software programs or music have traditionally been distributed through a physical distribution chain. The software or music is copied
onto physical media (e.g. floppy disks, CDs, DVDs), inserted into physical packaging (e.g. cardboard boxes, plastic jewel cases) and physically distributed through a multi-party distribution chain
that eventually delivers the goods to a reseller where they are ultimately purchased by the customer.

The
traditional distribution chain for software has three common distribution models: direct, 2-tier and 3-tier. Many publishers employ all three models
simultaneously to maximize their points of distribution.



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Original
equipment manufacturers ("OEMs") represent a variant of the 2-tier and 3-tier models. OEMs include prepackaged or bundled software with their
equipment to increase the perceived value of their product offering. Publishers provide their software to OEMs that distribute their products, together with the software, directly to their
customers in a 2-tier model or through resellers in a 3-tier model. This model provides publishers with an effective means to increase unit volume.

The
distribution of music and other high volume digital goods is similar to software distribution in many respects. For example, music labels acquire rights to recorded works from
artists. These labels distribute music in physical media such as CDs through large retail chains as well as distribution channels to other resellers. Music is also distributed through clubs, mail
order and other direct sales channels as well as over the Internet.

Limitations of Physical Distribution of Digital Goods and Licenses

In each distribution model, participants in the physical distribution of digital goods must manage the costs of manufacturing, warehousing and shipping
physical inventory. In addition, the physical distribution process imposes significant time delays and geographic constraints on the delivery of products and licenses. These numerous and complex
inter-relationships pose challenges to the timely and accurate sharing of information about customers, products, configuration, pricing, inventory and order status. Further, limitations on
warehousing, transportation systems and retail shelf space restrict the number of products that publishers can make available to customers and discourage distributors from carrying low volume
products. Finally, paper-based licenses are difficult to manage and enforce.

Electronic Distribution of Digital Goods and Licenses

The Internet provides a foundation for electronic distribution of digital goods and licenses. In January 2000, Forrester Research, Inc. predicted
the on-line sale of media products (software, music, books, video, and games) will grow from $3.6 billion in 1999 to $13 billion in 2004 and that the portion of these sales
delivered via digital download to grow from 3% to 22% during this time frame. By 2004, software and music products are projected to account for 58% of the on-line sales and 83% of the
digital download revenues.

Electronic
distribution of digital goods and licenses can:



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Although
electronic distribution of digital goods offers many advantages, many existing systems for the electronic distribution of digital goods displace and compete with existing
distribution channels rather than support them. Some systems offer insufficient security against improper distribution and piracy. Other systems provide insufficient real-time information
on sales transactions involving multiple distribution partners. Finally, we believe many systems offer inadequate means for distributing licenses. For example, many corporations that use some form of
electronic software distribution still employ manual processes for managing licenses.

The Preview Systems Solution

We develop and market infrastructure software that allows our customers to implement Internet-based networks for the electronic distribution and licensing of
digital goods. Our solution provides publishers, distributors, OEMs, and resellers the ability to implement and maintain common networks that allow them to conduct business with each other
electronically and seamlessly. Our solution is flexible and compatible with a wide array of business and technical requirements and provides a common technical infrastructure that uses the Internet to
link participants engaged in the electronic distribution of digital goods and associated licensing. Our solution has the following characteristics:



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Products

We offer a flexible, secure and scalable infrastructure solution for electronic distribution of digital goods. Our solution is specifically designed to meet
the needs of each participant in the distribution

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chain. The table below describes each component of the network and includes product names, and key features of our solution as well as target users.

|Components                                                  |  | Key Features                                                                                                                                                                                        |  | Target Users                   
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------
|Digital Packaging (Vbox and ZipLock Builder)                |  | Encrypts products for digital distribution and offers several options to protect intellectual property and licensing rights                                                                         |  |  Publishers                   
|Inventory and License Management System (ZipLock System)    |  | Manages the database of digital goods inventory and provides secure, automated and reliable fulfillment of licenses and products, records transactions and exchanges information with other servers |  |  Publishers
 Distributors    
|Merchandizing and License Selling System (ZipLock Gateway)  |  | Adds digital goods shopping cart functionality to Internet storefronts and enables electronic delivery of digital inventory and licenses                                                            |  |  Publishers
 Resellers       
|Off-Line Storefront (PortableStore)                         |  | Provides a software storefront using CD, DVD or hard disk storage media that delivers encrypted digital goods ready for online licensing                                                            |  |  Publishers
 Resellers
 OEMs
|Digital Rights Management and Delivery Client (Vbox Client) |  | Manages the reliable download and the usage rights of digital goods on the user's computer                                                                                                          |  |  End-Users                    

Professional Services

We provide our customers with the support needed to implement and maintain flexible, scalable and secure networks for the electronic distribution of digital
goods. Our solution includes the following services:



We
provide limited consulting, training and support as part of our initial integration fee and maintenance agreements. We provide additional consulting, training and premium support,
generally on a time-and-materials basis. In addition, we recently began offering a managed service whereby we operate certain parts of our technology on behalf of customers,
including the Ziplock System and the Portable Store, and charge fees that include one-time set up fees and ongoing transaction fees based on a percentage of sales.

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Customers and Strategic Relationships

Our customers consist of software publishers, distributors, OEMs and service providers. Some companies license our solutions directly from us. Others
use our technology through sublicenses or outsourcing agreements with our customers.

Several
leading software publishers have selected our solution to distribute their products electronically through direct and indirect channels. As an example, Macromedia and
Powerquest have opted for an in-house model that integrates our solution with the rest of their e-commerce systems while Symantec has chosen an outsource model and operates our
solution through an independent Internet-based reseller. We have also established relationships with several service providers such as ReleaseNow who maintain and operate our solution to distribute
products for various software publishers.

We
have the following significant customer relationships:



Sales and Marketing

We promote and sell our solution to publishers, OEMs, distributors and resellers through our direct sales force in North America and Europe. In Japan, we
promote and sell our solution through our relationship with Sony Marketing of Japan. Effective April 1, 2001, we will promote and sell our solution directly in Japan through our wholly owned
subsidiary, Preview Systems KK.

We
complement our direct sales efforts with our service provider partners who provide an outsource solution to some publishers and resellers. Service providers combine our solution
with other technology to provide an outsourced electronic commerce service to publishers and resellers of digital goods. These arrangements allow publishers and resellers to more rapidly offer
products for sale via the Internet or to establish an Internet store without the need to invest in the technology.

Our
marketing efforts are designed to create greater awareness of our solution and the benefits it affords to publishers, distributors and resellers of digital goods. We market our
solution through targeted activities including trade shows, conferences, direct mail, electronic marketing and marketing materials. In addition, we engage in co-marketing activities with
our customers, including production and distribution of co-branded collateral, joint sponsorship of conferences and public relations.

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Technology

We have developed a set of technologies for the establishment of channel neutral, flexible, scalable and secure networks for the electronic distribution of
digital goods. These technologies include server components, components for integration with shopping catalogs, databases and web browsers, management and audit tools. They include tools for
encryption of digital goods, and client software for the reliable delivery of digital goods and management of digital use rights. They also include agent software for monitoring usage and personalized
marketing.

Our
solution employs a distributed server architecture that separates the issuance of electronic licenses from the delivery of digital goods. Our solution can be integrated with
industry standard web storefronts such as Microsoft Site Server, Open Market and BroadVision and databases such as Microsoft SQL Server, Oracle, and Sybase. Our solution allows our customers to use
their existing web storefronts and databases for processing and storage of digital goods transactions, as well as to employ customary techniques for data replication and load management.

Communications
between servers, from gateways to servers, and from client software to servers and gateways are secured using standard encryption techniques.

By
employing a distributed architecture and by interfacing with standard technologies where appropriate, we have designed a highly scalable and robust network solution to enable
secure and automated digital goods commerce and real-time information flow between multiple business entities. We have also enabled seamless communication and rights management with
customers both when connected and when disconnected from the Internet.

We
spent approximately $13.4 million, $7.9 million and $3.7 million on research and development activities during 2000, 1999 and 1998, respectively.

Competition

The competition for digital goods solutions is strong and evolves quickly. We expect that competition will intensify, both with respect to existing competitors
as well as with the entry of new competitors into our markets. We currently compete directly with other providers of electronic commerce solutions for digital goods such as Cybersource, Digital River,
and InterTrust Technologies. More broadly, we compete with other providers of technology to secure digital content such as IBM, Liquid Audio, Microsoft, Real Networks, Macrovision, and Xerox.

The
primary bases for competition currently include:



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Intellectual Property

Our success depends in part on our ability to protect our proprietary rights to the technologies used in our solution. If we do not adequately protect our
proprietary rights, our competitors can use the intellectual property that we have developed to enhance their products and services, which would harm our business. We rely on a combination of patents,
copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, but these legal means afford only limited protection.

We
are actively seeking patent protection for our intellectual property. As of March 21, 2001, we had 11 patents issued or allowed and an additional 19 applications pending
with the United States Patent and Trademark Office. We pursue international counterpart patents where appropriate and have 13 outstanding applications pending in foreign jurisdictions as of
March 21, 2001. In addition, in May 1998, we acquired a United States patent that was issued in 1987.

Despite
any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our solution or to obtain and use information that we regard as
proprietary. In addition, the laws of some countries may not protect our proprietary rights as fully as do the laws of the United States. Thus, the measures we are taking to protect our proprietary
rights in the United States and internationally may not be adequate. Finally, our competitors may independently develop similar technologies.

Employees

As of March 21, 2001, we had 100 employees, of which 60 were employed in research and development, 24 were employed in sales and marketing, and 16 were
employed in administrative positions. These numbers reflect an approximate 25% reduction in our workforce as a result of our decision to eliminate 37 positions in February 2001. Our employees
are not represented by a collective bargaining unit and we have never experienced a work stoppage.

Recent Developments

The market for distribution of digital content is developing more slowly than we originally anticipated. Consequently, our revenue growth has not met internal
projections. As a result, we have taken a variety of actions.

In
February 2001, we announced a reduction in our headcount of approximately 25%, eliminating 37 positions. We also introduced other expense control measures primarily in the
area of marketing programs and we reduced our reliance on outside contractors.

In
addition, we announced that we are currently exploring various strategic alternatives and are currently in negotiations to sell all or parts of our business. We believe that such a
sale could enhance both stockholder value as well as increase the benefits to our customers.

No
assurance can be given that we will be successful in completing any possible alternatives currently being explored. In addition, it is difficult to predict the impact of these
announcements on our ability to close sales contracts with new customers, our ability to renew contracts with existing customers, or our ability to retain key employees.

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Risk Factors

You should carefully consider the risks described below in evaluating our company. In addition, you should keep in mind that the risks described below are not
the only risks that we face. The risks described below are the risks that we currently believe are material risks. However, additional risks not presently known to us, or risks that we currently
believe are not material, may also impair our business operations. Moreover, you should refer to the other information contained in this Form 10-K for a better understanding of our
business. All dollar references are in thousands.

Our
business, financial condition, or results of operations could be adversely affected by any of the following risks. If we are adversely affected by these risks, then the trading
price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business

We are in negotiations to sell all or parts of our business. Negotiations such as these are complex and costly and, even if successful, the transaction involves many risks.

In February 2001, we announced that we are exploring strategic alternatives to increase stockholder value and are currently in negotiations to sell all
or parts of our business. No assurance can be given that these activities will culminate in a transaction that would actually increase stockholder value. These activities may adversely affect our
relationships with our current and prospective customers, employees and management. These activities are time consuming and could divert management's attention from our business and prove disruptive
to our customers and employees. These activities are also costly in that they result in significant legal and investment banking expenses, regardless of whether or not a transaction is ultimately
concluded.

In
addition, these types of transactions create numerous other risks and costs, even if successfully closed, such as:



We have not been successful in generating sufficient revenues to sustain our business through our transaction fee based business model.

The success of our business model depends upon our ability to generate network transaction fees based on a percentage of the sales fulfilled by our customers
using our solution. Our customers have had limited experience using our solution to distribute their products and our current business model has not generated sufficient revenues to sustain our
business. The failure of customers to sell significant amounts of digital goods using our solution has resulted in slower revenue growth. We depend on our existing and future customers to use and to
facilitate the use of our solution and the failure of our customers to do so has caused and will continue to cause our revenues to be below levels sufficient to sustain our business. To date, we have
not been able to generate significant network transaction fees under this transaction fee model nor do we expect to generate significant revenues from this source in the foreseeable future. Because we
have been unable to generate significant revenues from network transaction fees, our current revenues, consisting primarily of annual minimum network transaction fees payable upon execution and
renewal of customer agreements, has been insufficient to sustain our business.

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Moreover, we may not be able to grow our business using our current business model because our existing customers may not elect to renew their agreements or they, as well as future
customers, may seek more favorable terms or may seek to use different business models, such as the payment of a one-time license fee instead of ongoing network transaction fees. Any of
these changes may result in a
decrease in our revenues. We are currently negotiating with Ingram Micro, one of our largest customers, regarding the terms of its agreement which may have the effect of modifying the manner in which
we would be entitled to receive fees from them. Further, since our announcement in February 2001 that we were exploring strategic alternatives, prospective customers may be reluctant to use our
solution and our current customers may not renew their agreements given the uncertainty surrounding our business.

Our limited operating history makes it difficult for you to evaluate our business and your investment.

We were formed in April 1998 to acquire all of the outstanding equity interests of Preview Software and Portland Software. These acquisitions closed in
August 1998. Prior to August 1998, Portland Software and Preview Software had achieved only limited distribution of their respective products. For example, in 1998, 1997, and 1996, total
revenues generated by both businesses combined were $809, $763, and $335, respectively. For the years ended December 31, 2000 and 1999, our total revenues were $7,768 and $3,483, respectively.
A majority of our significant customers entered into their agreements with us since September 1998. Accordingly, we have a limited operating history and you have little historical basis upon
which to evaluate our business, products, markets and general prospects of your investment.

We have incurred significant net losses and we expect our losses will continue in the future.

As of December 31, 2000, we had an accumulated deficit of $55,444. We experienced a net loss of $24,502 for the year ended December 31, 2000, and
net losses of $17,054 and $11,276 in 1999 and 1998, respectively. We have not achieved profitability and we expect significant operating losses and negative cash flow to continue through at least the
end of 2001, and possibly longer.

If our remaining key employees do not continue to work for us, our business will be harmed because competition for replacements is intense.

We are substantially dependent on the continued services of our officers and key personnel who are all at-will employees. These individuals have
acquired specialized knowledge and skills with respect to our business. As a result, if any of these individuals were to leave, we could face substantial difficulty in hiring qualified successors and
could experience a loss in productivity while the new employee obtains the necessary training and experience. At times, we have experienced difficulties in hiring personnel with the right training or
experience, particularly in technical areas.

In
February 2001, we announced that we were exploring strategic alternatives, including the sale of all or parts of our business and reduced our work force by approximately 25%
as part of a cost cutting measure. These actions have created additional uncertainty for our remaining work force and have resulted, and may continue to result, in the loss of key personnel, including
key members of our management.

In
February 2001, we adopted a retention program that provides additional compensation to all non-executive employees. In addition, the Company is in the process of
creating a retention program for certain of its officers. There are no assurances that such programs will be successful in retaining our key employees and officers.

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If a significant number of distribution channel participants do not agree to sell digital goods through our solution, we may not be successful.

The distribution channel for digital goods is complex and multi-tiered, consisting of publishers, which sell to distributors, resellers and end customers;
distributors, which sell to resellers; original equipment manufacturers, which sell to resellers and end customers; and resellers, which sell to end customers. Because a significant number of these
channel participants have yet to adopt our solution in a timely manner, we may not achieve the critical mass of participants we believe necessary for our success. Our success depends on the adoption
of our solution not only by our customers, but by the distribution channel partners of our customers as well. For example, in order for a distributor to sell digital goods using our solution, the
publisher of the goods must consent to distribute its goods electronically and the reseller of the goods must also agree to use our solution. We do not know whether our customers' distribution channel
partners will agree to use our solution. We depend on our customers to obtain publisher consents and to facilitate the adoption of our solution by their distribution channel partners. Unless a
significant number of our customers' distribution channel partners agree to sell digital goods through our solution, we may not be able to earn enough revenues from our network transaction fees to
become profitable or execute our business model. To date, we have not been successful attracting the critical mass of channel participants necessary for our success.

The loss of any of our current major customers would cause our revenues to decline.

Sony Marketing of Japan accounted for 15%, 26% and 45% of our total revenues in 2000 1999, and 1998, respectively. Ingram Micro accounted for 7% and 12% of our
total revenues in 2000 and 1999, respectively. While we have reduced our reliance on major customers during 2000, we expect that our larger customers will continue to account for a substantial portion
of our revenues for the foreseeable
future. Contracts with our customers are generally short term in nature, varying in length from one to three years, and can be terminated by the customer on short notice without significant penalties.
A failure to renew, the termination of, or a renewal on less favorable terms to us of, any of these agreements, would result in a loss of a large portion of our revenues. We mutually agreed with Sony
Marketing of Japan to terminate our current agreement effective March 31, 2001, resulting in the loss of any future revenues associated with this major customer. Further, we are currently
negotiating with Ingram Micro regarding the terms of a new agreement. Ingram Micro is currently on a month to month extension of its original agreement, which expired on June 30, 2000. No
assurance can be given that we will be successful in negotiating a long-term contract with Ingram Micro or that the terms will not be less favorable than the terms of the current
agreement.

If Microsoft does not consent to the electronic distribution of its products through distributors using our solution or adopt our solution for direct sales, we may be unable to
increase our revenues or become profitable.

Sales of Microsoft products accounted for approximately 11% of worldwide packaged software sales in 2000 according to International Data Corporation. If
Microsoft does not consent to the electronic distribution of its products through distributors using our solution or adopt our solution for direct sales, we will lose a significant revenue
opportunity. Additionally, Microsoft may initiate its own standard for the electronic distribution of its software over the Internet. To date, Microsoft has not agreed to make its products available
to channel participants using our solution. Microsoft has also recently initiated programs for the secure electronic distribution of music. If distribution channel participants favor Microsoft's
existing or future solution for electronic distribution of digital goods, we may be unable to increase our revenues or become profitable.

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Our sales cycle is lengthy and unpredictable which could cause us to fail to achieve projected results.

Our sales cycle is a long and complex process. If network transaction fees are delayed or reduced as a result of this process, our future revenue and operating
results could be impaired. Our sales process requires a significant level of education regarding the use and benefits of our solution. The purchase and deployment of our solution involves a
significant commitment of capital and other resources. As a result, our customers typically spend substantial time performing internal reviews and obtaining corporate approvals before making a
purchasing decision. Accordingly, the period between our initial sales call and the signing of a contract with significant sales potential typically ranges from four to six months and can be
significantly longer. Therefore, the timing of sales to new customers is difficult to predict.

Further,
since our announcement in February 2001 that we were exploring strategic alternatives, prospective customers may be reluctant to use our solution given the uncertainty
surrounding our business and may seek additional assurances before signing a contract with us. In addition, recent economic developments may cause delays in the approval of new initiatives to deploy
Internet infrastructure solutions, reducing further our ability to close new contracts. Delays in receiving signed contracts with major customers could cause us to fail to achieve our projected
results, as well as those of industry analysts, which would have a severe adverse effect on the price of our stock.

Our solution has not been used under high-volume transaction conditions and it may not meet the demands of our high-volume customers.

Our solution has not yet been subjected to the volume of business and the complexity we anticipate will be required to fully support the future transactions of
our largest customers. If our solution is not capable of processing the necessary volume of transactions, our business may be seriously harmed because the number of revenue generating transactions
using our solution will be limited, customers may elect to use another solution and we may be exposed to adverse publicity. In addition, it is likely that production software tools, diagnostic tools
and maintenance upgrades, as well as significant financial and other resources, will be required to achieve reliability and resolve technical issues related to large-scale transactions.

If our maintenance and upgrades to our solution disrupt our customers' operations, we may suffer lost revenues and harm to our reputation.

We will need to upgrade and improve our solution periodically. Upgrading or deploying a new version of our solution requires the cooperation of our existing
customers and their network participants. These network participants may be reluctant to upgrade our solution since this process can be complicated and time-consuming and poses the risk of
network failures. If our periodic upgrades and maintenance cause disruptions, we will lose revenue generating transactions, our customers may elect to use other solutions and we may also be the
subject of negative publicity that may further adversely affect our business and reputation.

Delays caused by integrating our solution with channel participants' existing systems may cause revenue shortfalls in a particular quarter.

Our customers and their distribution channel partners must integrate our solution into their existing systems or a new system. Our business model is based on
receiving network transaction fees. Thus, our
success depends upon the timely and successful deployment of our solution by customers and their distribution channel partners for the distribution and licensing of digital goods.

The
timing and success of commercial deployment depends upon the:



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We
have, in the past, experienced, and continue to experience, delays in the period between entering into a licensing arrangement and the time a customer commercially deploys our
solution. We expect that this period will continue to vary widely from customer to customer.

Variations in the volume of sales of digital goods and services over the Internet may cause fluctuations in our quarterly operating results, which could cause our stock price
to decline.

The amount of network transaction fees we receive in any given quarter will depend on the sales of digital goods that occur using our solution. Because sales
of digital goods using our solution are outside of our control, it will be difficult for us to make accurate quarterly revenue projections, even if our solution is deployed commercially by our
licensees. In addition, our revenues will depend on the number of new deployments of our solution that occur in a particular quarter. However, in the short
term, our operating expenses are relatively fixed and based in part on our revenue projections. As a result, if our revenue projections are not accurate for a particular quarter, our operating results
for that quarter could fall below the expectations of analysts and investors. To date, the sale of digital goods has progressed slower than we had anticipated and our customers have not used our
solution to the degree we projected. In the third and fourth quarter of 2000, we failed to meet our revenue projections and our operating results were below what industry analysts predicted. Failure
to meet these expectations contributed to the decline of the market price of our common stock during this time and may continue to do so in the foreseeable future.

Security breaches to our encryption technology may harm our reputation and business and may cause us to expend significant additional resources to protect against future
breaches.

Individuals, referred to as crackers, have in the past gained unlicensed access to secured digital goods distributed through our solution. While we expend
significant efforts to make unauthorized access increasingly difficult, we expect that determined crackers will continue their attempts to crack our solution and may prove successful. We may have to
expend significant resources to alleviate problems caused by these attempts to crack our solution.

Any
breach of our security systems could harm our reputation, which could materially harm our business. A party who is able to circumvent our security measures could misappropriate
digital goods without paying the required license fees, gain unauthorized access to proprietary information, erase or modify electronic audit trails, or disrupt our customers' operations. Security
breaches could also harm our reputation and expose us to litigation and liability. We cannot assure you that our security measures will prevent significant security breaches or that a failure to
prevent such security breaches will not seriously harm our business.

Our managed services offering is new, we have limited experience operating our technology and we have not recognized significant revenues from this service.

We introduced a managed service offering in the fourth quarter of 2000 and incurred the capital costs required to operate our technology on behalf of future
customers. To date, we have had limited success in selling our managed service offering. In addition, we have limited experience in operating our technology on behalf of customers. We are required to
provide payment processing, customer

14

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support and merchandising services, all of which are new to our business and may result in unforeseen costs. We cannot assure you that this new service will be successful or, even if we are successful
in attracting new customers, that we will recognize significant revenues.

To date, we have not recognized any significant revenues from the use of our solution by our customers to sell digital music, and we may not ever recognize meaningful revenues
from these sales.

We have experienced limited success in marketing our solution for electronic distribution of music and few customers are currently using our solution to
distribute music. As a result, we have not recognized nor do we anticipate recognizing any significant revenues from the use of our solution to sell music or any type of digital goods other than
software for at least the next 12 months. In addition, we have incurred significant research and development costs as well as sales and marketing costs to develop and promote the use of our
solution for the electronic distribution of music. Further, we may find that our continuing efforts to expand into the digital music market may be more expensive than we currently anticipate. Because
we have been unable to penetrate this market, we have expended a great deal of time, effort and financial resources that could have been directed to more beneficial activities. In addition, our
business may be adversely impacted if our efforts continue to be unsuccessful.

Several
factors create risk in our ability to be successful in this market, including:



15

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Our intellectual property rights are difficult and costly to protect because our industry is characterized by the existence of a large number of patents and frequent
litigation. This may place a significant burden on our management team and may make it difficult for us to operate our business successfully.

The digital encryption and distribution industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of
patent infringement and the violation of other intellectual property rights. We regard our patents, copyrights, trademarks, trade dress, trade secrets, and similar intellectual property as critical to
our success. We have 11 patents issued or allowed, and an additional 19 applications pending with the United States Patent and Trademark Office and an additional 13 patent applications pending in
foreign jurisdictions. Our proprietary technologies will be protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or copyrights or
are effectively maintained as trade secrets. These legal protections afford only limited protection and may be time consuming and expensive to defend. In addition, litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial
costs and diversion of management and technical resources away from our business operations. Despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our
intellectual property. If we are not able to protect our intellectual property rights, our business may not succeed.

Factors outside our control may limit our expansion in international markets and may prevent us from developing international revenues.

Although we sell our solution to customers outside the United States, we might not succeed in expanding our international presence. To date, we have relied on
Sony Marketing of Japan to distribute our products in Japan, but effective April 1, 2001, we will sell and promote our products directly through our wholly owned subsidiary in Japan. Our
success in Japan will be dependent on our ability to

16

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successfully transition support for existing customers from Sony Marketing to our internally managed activity and on our ability to attract and service new customers in that market.

Conducting our business outside the United States subjects us to unfavorable international regulations and conditions affecting businesses that operate in our industry and
could cause our international business to fail.

Conducting our business outside of the United States is subject to additional risks related to our business which are largely outside our control, including:



One
or more of these factors may materially and adversely affect our future international operations, and consequently, our business.

We may need to raise additional funds in the future, which could result in dilution.

We require substantial working capital to fund our business. We expect our existing capital resources to be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. After that, we may need to raise additional funds, and additional financing may not be available on favorable terms, if at all. This could
seriously harm our business and operating results. Furthermore, if we issue additional equity securities, stockholders may experience dilution, and the new equity securities could have rights senior
to those of existing holders of our common stock. If we raise additional funds through the issuance of debt securities, holders of these securities could have rights, preferences, and privileges
senior to holders of common stock, and the terms of this debt could impose restrictions on our operations. If we need to raise funds and cannot do so on acceptable terms, we may not be able to develop
or enhance our solution, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements.

Our executive officers and directors continue to have substantial ownership control over us, which provides them significant influence over the approval of actions submitted to
shareholders.

As of March 21, 2001, our executive officers, directors and entities affiliated with them and affiliates, in the aggregate, beneficially owned
approximately 40% of our outstanding common stock. These stockholders, if acting together, would be able to influence significantly the election of directors and all other matters requiring approval
by our stockholders.

17

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Our charter documents have anti-takeover provisions that could discourage a change in control, even if an acquisition would be beneficial to our stockholders.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders. These provisions include:



Substantial sales of our common stock could depress our stock price.

Substantial sales of our common stock could depress our stock price. If our stockholders sell substantial amounts of our common stock in the public market, the
market price of our common stock could fall. Based on 17,316,667 shares outstanding as of March 21, 2001, we had 17,164,049 shares of common stock eligible for sale in the public market. The
remaining shares of common stock outstanding will be eligible for sale upon the lapse of our repurchase options on various dates through July 2003.

Risks Related to Our Industry

The success of our business will largely depend on the widespread acceptance of commerce in digital goods over the Internet.

The use of the Internet for distribution and licensing of digital goods may not be commercially accepted for a number of reasons, including:



In
addition, our business will be seriously harmed if publishers, distributors or resellers of digital goods are unwilling to sell their digital goods over the Internet. These factors
are outside of our control. If commerce in digital goods does not achieve widespread market acceptance or grow significantly, we may be unable to generate sufficient revenue to sustain our business.
To date, growth of the industry for distribution of digital goods has been slower to develop than we originally anticipated and several industry analysts, such as Forrester Research Inc. and
International Data Corporation have reduced their growth projections for the industry.

18

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Our market is subject to rapid technological changes. We may not be able to introduce new products and enhancements on a timely basis, impairing our ability to generate future
revenue.

The market for electronic distribution and licensing of digital goods is fragmented and marked by rapid technological change, frequent new product
introductions and enhancements, uncertain product life cycles, and changes in customer demands. There is currently no standard for electronic distribution and licensing of digital goods. New products
based on new technologies or new industry standards can quickly render existing products obsolete and unmarketable. In the past, we have experienced delays in new product releases and we may
experience similar delays in the future. Any delays in our ability to develop and release enhanced or new systems could seriously impair our ability to generate future revenue.

We are in a highly competitive industry, and we expect to face increased competition in the future; increased competition may reduce our revenues and market opportunity.

The market for electronic distribution and licensing of digital goods is rapidly evolving and intensely competitive. We expect competition to intensify in the
future. We currently compete directly with other providers of electronic commerce solutions for digital goods such as Cybersource, Digital River and InterTrust Technologies. More broadly, we compete
with other providers of technology to secure digital content such as IBM, Liquid Audio, Microsoft, Real Networks, Macrovision and Xerox, as well as solutions developed in-house. In the
future, operating system manufacturers may include digital rights management solutions in their operating systems.

We
believe that the principal competitive factors in our markets include:



Many
of our current and potential competitors have longer operating histories, existing significant revenue streams, larger customer bases, greater brand recognition, larger market
capitalization and much greater financial, marketing and other resources than we do. In addition, larger, well-established and well-financed entities may acquire, invest in or
form joint ventures with competitors as the use of the Internet and other online services increases. Increased competition may result in reduced prices, and loss of market share may negatively impact
our ability to obtain network transaction fees. In addition, adoption by publishers, distributors and resellers of competing systems may significantly limit the size of the potential market for our
solution. We may not be able to compete successfully against current and future competitors, and any inability to do so would materially adversely affect our business.

We may be sued for violating the intellectual property rights of others.

The digital encryption and distribution industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of
patent infringement and the violation of other intellectual property rights. We have not completed an in-depth and exhaustive analysis of such patents or applications. Some of our
competitors have extensive patent portfolios with broad claims. As the number of competitors in the market grows and the functionality of our solution increases, the possibility of an intellectual
property claim against us increases. In addition, because patent applications can take many years to issue, there may be a patent application now pending, of which we are unaware, which will cause us
to be infringing when it is issued in the future. Moreover, we expect to receive

19

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more patent infringement claims as companies increasingly seek to patent their software, especially in light of recent developments in the law that extend the ability to patent software. To address
these patent infringement or other intellectual property claims, we may have to redesign our solution to avoid infringement or enter into royalty or licensing agreements on disadvantageous commercial
terms. We may be unable to successfully redesign our solution or obtain a necessary license. A successful claim against us or our licensees, or our failure to design around the infringed technology or
license it or similar technology, would harm our business. In addition, any infringement or other intellectual property claims, with or without merit, which are brought against us could be time
consuming and expensive to litigate or settle and could divert management's attention from our business.

In
April 1998, our predecessor and subsidiary, Portland Software, received a letter from representatives of TAU Systems Corporation informing us of two patents held by TAU
Systems. In the letter, the representatives stated their opinion that Portland Software's ZipLock System software contained various elements recited in the two patents and requested that Portland
Software discuss licensing the technology of these patents. Portland Software responded to the letter stating that although it had not undertaken a detailed review of the patents, it was unaware of
any of its products having one of the elements required by the patent claims. In March 1999, we received correspondence from TAU Systems, essentially reiterating the above claims. In
August 1999, after further investigation of the TAU Systems patents, we notified TAU Systems that we do not believe our software falls within the scope of coverage of TAU Systems' patents and,
therefore, we were not interested in licensing arrangements. We have not received further correspondence from TAU Systems.

In
March 1999, the United States District Court for the District of Connecticut dismissed a lawsuit filed by E-Data against several defendants, including Portland
Software, alleging that they infringed E-Data's U.S. Patent No. 4,528,643 ("System for Reproducing Information in Material Objects at a Point of Sale Location"), issued in
July 1985. Although the suit was dismissed, it may be reinstated depending upon the outcome of E-Data's appeal before the Federal Circuit of a New York district court's dismissal of
a prior patent infringement suit on the same patent that was filed by E-Data against different defendants.

In
October 2000, Network Commerce, Inc. filed a civil action against us in the Federal District Court for the Western District of Washington in Seattle. The complaint
alleges that we infringed U.S. Patent No. 6,073,124. Service was accomplished on February 28, 2001. In March 2001, the Company and Network Commerce, Inc signed a settlement
agreement, mutual release and covenant not to sue. As a result, the Company obtained a perpetual license to use the technology. The cost of the license agreement, which is not material to our
financial position, was accrued and capitalized as an intangible asset as of December 31, 2000. The cost of the license will be amortized over five years. In the future, we, or our licensees,
could be found to infringe upon the patent rights of TAU Systems, E-Data, Network Commerce or other companies.

We have been, and may in the future be, subject to litigation that may adversely affect us.

From time to time we have been, and may in the future be, subject to legal proceedings and claims in the ordinary course of our business, including claims of
alleged infringement of third-party intellectual property rights by us and our licensees. We were subject to litigation initiated by 20/20Software, Inc. in the United States
Court for the District of Northern California. The 20/20 complaint alleged copyright infringement, unfair competition, interference with prospective economic advantage and
misappropriation of trade secrets and confidential information of 20/20. In October 1999, we entered a settlement agreement with 20/20 regarding these claims and
with no admission of liability. In December 1999, 20/20's counsel sent us a letter indicating that 20/20 continued to believe that we had misappropriated
20/20's technology and 20/20 therefore intended to assert additional claims. Our counsel responded that any such claims would be covered by the prior settlement agreement. We have not
received any further communication. It remains unclear whether 20/20 will assert any future claims or, if

20

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so, on what basis such claims might be asserted. Claims like these, whether or not meritorious, could result in the expenditure of significant financial and managerial resources and could materially
and adversely affect our business.

Legal uncertainties and potential government regulation could increase our costs and be a barrier to doing business.

To date, communications and commerce on the Internet have not been highly regulated. State and federal governments may decide to enact new laws or regulations
at any time and it may take years to determine the extent to which existing laws relating to issues including property ownership, defamation, and personal privacy apply to the Internet. Any new laws
or regulations or implementations of existing laws and regulations relating to the Internet could harm our business.

The
European Union has adopted a privacy directive that regulates the collection and use of information that identifies an individual person. These regulations may inhibit or prohibit
the collection and sharing of personal information in ways that could harm our partners or us. The globalization of Internet commerce may be harmed by these and similar regulations since the European
Union privacy directive prohibits transmission of personal information outside the European Union unless the receiving country has enacted individual privacy protection laws at least as strong as
those enacted by the European Union privacy directive. The United States and the European Union have not yet resolved this matter, and they may not ever do so, in a manner favorable to our customers
or us.

Imposition of sales and other taxes on electronic commerce transactions may hinder electronic commerce.

The taxation of commerce activities in connection with the Internet has not been established, may change in the future and may vary from jurisdiction to
jurisdiction. One or more states or other countries may seek to impose sales or other taxes on companies that engage in or facilitate electronic commerce. A number of proposals have been made at the
local, state and international level that would impose additional taxes on the sale of products and services through the Internet. These proposals, if adopted, could substantially impair the growth of
electronic commerce and could significantly harm our business. Moreover, if any state or other country were to assert successfully that
we should collect sales or other taxes on the exchange of products and services through the Internet, our business may be harmed.

The trading price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations.

The trading price of our common stock has been and is likely to continue to be highly volatile and has been subjected and most likely will continue to be
subject to wide fluctuations as a result of numerous factors such as:



21

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In
addition, the stock market in general, and the Nasdaq National Market and the market for Internet-related and technology companies in particular, has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. These broad market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action
litigation has often been instituted against such companies. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which could
materially adversely affect our business, financial condition and operating results.

Item 2. Properties

We lease approximately 26,100 square feet of space in Sunnyvale, California to house our principal executive and administrative functions. This lease expires
on August 31, 2003 but the landlord has exercised an option to terminate the lease as of June 30, 2001. In addition, we have executive and administrative offices located in Portland,
Oregon, where we lease approximately 20,800 square feet. We also maintain small sales offices in the London and Tokyo metropolitan areas. We believe our existing facilities are adequate to meet
current requirements and that additional or substitute space will be available as needed to accommodate any expansion of operations. We are currently exploring various alternatives to relocate our
Sunnyvale, California offices.

Item 3. Legal Proceedings

In October 2000, Network Commerce, Inc. filed a civil action against us in the Federal District Court for the Western District of Washington in
Seattle, case number C00-1790L. The complaint alleges that we infringed U.S. Patent No. 6,073,124. Service was accomplished on February 28, 2001. In March 2001, the
Company and Network Commerce, Inc signed a settlement agreement, mutual release and covenant not to sue. As a result, the Company obtained a perpetual license to use the technology. The cost of the
license agreement, which is not material to our financial position, was accrued and capitalized as an intangible asset as of December 31, 2000. The cost of the license will be amortized over
five years.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2000.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Our common stock trades on The Nasdaq National Market System under the symbol PRVW. The high and low sales prices for the period from December 8, 1999
(the date of our initial public offering) to December 31, 2000 were as follows:

1999

High

LowFourth Quarter

$
94.00

$
50.00


2000

High

LowFirst Quarter

$
71.81

$
43.75Second Quarter


47.00


10.50Third Quarter


13.69


7.63Fourth Quarter


9.25


3.00


The
approximate number of beneficial shareholders and shareholders of record at March 1, 2001 was 2,711 and 461, respectively.

We
have never paid cash dividends on our capital stock and we have no plans to pay dividends in the future. Any payment of future cash dividends and the amounts of the dividends will
depend upon our earnings, financial requirements, and other factors deemed relevant by our board of directors. In addition, our bank loan arrangements restrict our ability to pay dividends.

The
following sales of unregistered securities occurred during the year ended December 31, 2000:



The
Company filed a registration statement on Form S-1, File No. 333-87181, for an initial public offering of common stock, which was declared
effective by the Securities and Exchange Commission on December 8, 1999. In that offering, the Company sold an aggregate of 4,370,000 shares of its common stock with net offering proceeds of
$82.4 million. As of December 31, 2000, the Company had used approximately $22.5 million of those proceeds as follows:

Cash loss from operations

$
17.9 millionWorking capital


1.4 millionPurchases of property and equipment


2.7 millionPurchases of intangible assets


0.5 million$
22.5 million


Item 6. Selected Financial Data

We were formed in April 1998 to acquire all of the outstanding equity interests of Preview Software and Portland Software. We completed both of these
mergers on August 5, 1998. In accordance with Accounting Principles Board Opinion No. 16, we determined the stockholders of Preview Software to be our controlling stockholders. As a
result, we accounted for our merger with Preview Software as a reorganization under common control with the underlying net assets recorded by us at historical cost. We accounted for our merger with
Portland Software using the purchase method.

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The following selected consolidated financial data reflect our operations and those of Preview Software, and reflect the operations of Portland Software from August 5, 1998.

|In Thousands (except per share data)                               |                            | 2000                     |         | 1999   |        | 1998    |       | 1997   |         | 1996  |       
|------------------------------------------------------------------ | -------------------------- | ------------------------ | ------- | ------ | ------ | ------- | ----- | ------ | ------- | ----- | ------
|Statement of Operations Data                                       |                            |                          |         |        |        |         |       |        |         |       |       
|Revenues:                                                          |                            |                          |         |        |        |         |       |        |         |       |       
|                                                                   | Network transaction fees   |                          | $       | 6,523  |        | $       | 2,328 |        | $       | 435   |       
|                                                                   | Services                   |                          |         | 1,245  |        |         | 1,155 |        |         | 175   |       
|                                                                   |                            |                          |         |        |        |         |       |        |         |       |       
|                                                                   |                            | Total revenues           |         |        | 7,768  |         |       | 3,483  |         |       | 610   
|Operating expenses:                                                |                            |                          |         |        |        |         |       |        |         |       |       
|                                                                   | Research and development   |                          |         | 13,393 |        |         | 7,882 |        |         | 3,657 |       
|                                                                   | Sales and marketing        |                          |         | 13,530 |        |         | 7,289 |        |         | 3,368 |       
|                                                                   | General and administrative |                          |         | 4,446  |        |         | 3,169 |        |         | 1,960 |       
|                                                                   | Stock based compensation   |                          |         | 3,945  |        |         | 804   |        |         | 35    |       
|                                                                   | Acquisition related costs  |                          |         | 2,706  |        |         | 2,076 |        |         | 2,957 |       
|                                                                   |                            |                          |         |        |        |         |       |        |         |       |       
|                                                                   |                            | Total operating expenses |         |        | 38,020 |         |       | 21,220 |         |       | 11,977
|                                                                   |                            |                          |         |        |        |         |       |        |         |       |       
|Loss from operations                                               |                            |                          | (30,252 | )      |        | (17,737 | )     |        | (11,367 | )     |       
|Other income (expense), net                                        |                            |                          | 5,750   |        |        | 683     |       |        | 91      |       |       
|                                                                   |                            |                          |         |        |        |         |       |        |         |       |       
|Net loss                                                           |                            | $                        | (24,502 | )      | $      | (17,054 | )     | $      | (11,276 | )     | $     
|                                                                   |                            |                          |         |        |        |         |       |        |         |       |       
|Basic and diluted net loss per share                               |                            | $                        | (1.44   | )      | $      | (4.65   | )     | $      | (7.55   | )     | $     
|                                                                   |                            |                          |         |        |        |         |       |        |         |       |       
|Shares used in computing net loss per share                        |                            |                          | 17,022  |        |        | 3,666   |       |        | 1,494   |       |       
|                                                                   |                            |                          |         |        |        |         |       |        |         |       |       
|Balance Sheet Data                                                 |                            |                          |         |        |        |         |       |        |         |       |       
|Cash and cash equivalents                                          |                            | $                        | 40,432  |        | $      | 71,437  |       | $      | 4,886   |       | $     
|Short-term investments                                             |                            |                          | 38,033  |        |        | 17,914  |       |        |        |       |       
|Working capital (deficit)                                          |                            |                          | 78,268  |        |        | 88,173  |       |        | 3,021   |       |       
|Total assets                                                       |                            |                          | 92,823  |        |        | 98,225  |       |        | 12,490  |       |       
|Deferred revenue                                                   |                            |                          | 3,856   |        |        | 2,543   |       |        | 2,077   |       |       
|Long-term debt and capital lease obligations, less current portion |                            |                          | 24      |        |        | 289     |       |        | 435     |       |       
|Stockholders' equity                                               |                            |                          | 84,670  |        |        | 92,541  |       |        | 8,006   |       |       

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

(Numbers in thousands, except per share amounts)

Overview

We acquired all of the outstanding equity interests of Preview Software and Portland Software on August 5, 1998. Prior to the acquisitions, Portland
Software developed and licensed infrastructure
software applications designed to enable electronic software distribution among multiple distribution channel partners. Preview Software developed and licensed electronic software distribution
products that enabled management and enforcement of licensing rights both prior to and after electronic delivery to end customers. During the period immediately preceding merger discussions, several
key customers expressed to both companies the desire to license a system that would feature Portland Software's server software with the capabilities provided by Preview Software's client software. As
a result, the two companies decided to merge and combine their software and services into a single comprehensive solution. We were formed in April 1998 to effect this business combination.

In
accordance with Accounting Principles Board Opinion No. 16, we determined that the stockholders of Preview Software were our controlling stockholders. Accordingly, we
accounted for our

24

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merger with Preview Software as a reorganization under common control with the underlying net assets of Preview Software recorded at historical cost. We accounted for the merger with Portland Software
using the purchase method of accounting. Therefore, the accompanying consolidated financial statements reflect our operations and those of Preview Software for all periods presented and reflect the
operations of Portland Software since August 5, 1998.

We
generally provide rights to use our solution and ongoing customer support through annual licensing agreements. These agreements typically require the payment of network transaction
fees based on a percentage of the sales fulfilled using our solution. Our customers typically commit to minimum network transaction fees that entitle them to fulfill an agreed amount of sales during
the one-year term of the agreement. Some or all of the minimum network transaction fees are prepaid upon signing the agreement. We record deferred revenue related to these fees and
recognize them on a straight-line basis over the license period. To the extent sales fulfilled using our solution exceed the agreed amount of sales, we recognize incremental network
transaction fees. We recognize these incremental network transaction fees when the amounts due are known.

Service
revenues generally consist of consulting, training and integration fees. We typically bill these services and recognize them as the related services are performed or when
contract milestones are achieved.

We
entered into a three-year agreement with Sony Marketing of Japan in September 1998 that gives Sony Marketing the exclusive right to use and sublicense our
solution in Japan, including future upgrades, enhancements and new products. The agreement also provided for training and support through June 1999. We received non-creditable,
upfront payments for the license, services and training to be performed by us. We recorded deferred revenue on these upfront fees and recognize the license portion as network transaction fees on a
straight-line basis over the term of the agreement. We
recognized the service revenue as work was performed. In addition, beginning April 1999, Sony Marketing has agreed to pay us network transaction fees based on a percentage of the revenue it
receives from distributing our solution and providing related services. Sony Marketing committed to pay us annual minimum network transaction fees. If the network transaction fees paid by Sony
Marketing during the annual period are less than the annual minimum network transactions fees, Sony Marketing must pay us any shortfall. In December 2000, we mutually agreed with Sony Marketing
to terminate the contract effective March 31, 2001, one year earlier than originally scheduled. As part of the agreement, we will pay Sony $460 upon the effective date of the termination, an
amount equal to the pro rata share of the unamortized upfront license fee as of the termination date of the contract. We have opened a wholly owned subsidiary in Japan to sell and support customers
directly in this market effective April 1, 2001.

In
October 1999, we issued a warrant to purchase 265 shares of common stock to Virgin Holdings, Inc. at an exercise price per share equal to $9.00. These shares became
exercisable as follows: 99 shares upon grant of the warrant; 33 shares became exercisable upon achievement of a performance milestone in the first quarter of 2000; and an additional 133 shares were
cancelled as Virgin failed to achieve a final milestone in the fourth quarter of 2000. We recorded a non-cash charge, principally related to marketing activities, of $546 and $1,364 in the
fourth quarter of 1999 and first quarter of 2000, respectively, for the fair value, as determined by the Black-Scholes valuation model, of the portion of the warrant that vested during the quarter.

Recent Developments

The market for distribution of digital content is developing more slowly than we originally anticipated. Consequently, our revenue growth has not met internal
projections. As a result, we have taken a variety of actions.

25

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In February 2001, we announced a reduction in our headcount of approximately 25%, eliminating 37 positions. We also introduced other expense control measures primarily in the
area of marketing programs and we reduced our reliance on outside contractors.

In
addition, we announced that we are currently exploring various strategic alternatives and are currently in negotiations to sell all or parts of our business. We believe that such a
sale could enhance both stockholder value as well as increase the benefits to our customers.

No
assurance can be given that we will be successful in completing any possible alternatives currently being explored. In addition, it is difficult to predict the impact of these
announcements on our ability to close sales contracts with new customers, our ability to renew contracts with existing customers, or our ability to retain key employees.

Results of Operations

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenue

Total revenues were $7,768 for the year ended December 31, 2000 compared to $3,483 for the year ended December 31, 1999. One customer, Sony
Marketing of Japan, accounted for 15% of total revenues in 2000. Two customers, Sony Marketing of Japan and Ingram Micro, accounted for 26% and 12%, respectively, of total revenues in 1999. As
described above, we terminated our agreement with Sony Marketing of Japan effective March 31, 2001.

Network
transaction fees increased 180% to $6,523 in 2000 from $2,328 in 1999 and accounted for 84% of our total revenues in 2000 compared to 67% in 1999. Network transaction fees are
primarily the recognition of minimum commitments, which are recognized ratably over the term of the contract or until the sales that underlie the commitments are exceeded. Network transaction fees for
2000 include $508 related to the amortization of the value of equity investments received as partial consideration for licensing arrangements with two licensees. The value of these investments is
being amortized to revenue over the lives of the licensing arrangements. As of December 31, 2000, deferred revenue associated with these investments was $427.

The
increase in network transaction fees in 2000 over 1999 is primarily the result of the growth in our customer base and increased sales by our customers that are fulfilled by our
solution. In 2000, we added 22 new customers as licensees of our technology. In addition, 16 direct licensees went live taking commercial transactions and another 40 content owners have added digital
content to the network.
Transaction fees earned in excess of minimum commitments accounted for approximately 6% of transaction fee revenues during 2000 and were immaterial in 1999.

Future
network transaction fee revenue growth is dependent on continuing to expand our customer base, the timely and successful deployment of our solution by new customers and their
distribution channel partners, and the generation of transaction volume by customers above their minimum commitments using our solution. To date, transaction volumes have been slower to develop than
originally anticipated and in most cases have not exceeded minimum commitment levels. As a result, we are unable to predict if and when customers may generate significant transaction fees above their
minimum commitments. In addition, beginning in the second quarter of 2001, we will lose the ongoing revenue stream from Sony Marketing of Japan, our largest customer, due to our agreement to terminate
their contract, and we will refund $460 of prepaid license fees, which were recorded as a current liability at December 31, 2000.

Service
revenues generally consist of consulting, training and integration fees. Service revenues increased 8% to $1,245 in 2000 from $1,155 in 1999. This modest growth was due to
implementation delays dictated by some existing licensees, some customers choosing to implement our solution

26

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internally, and some customers who have subsequently chosen not to implement our solution due to an unsuccessful business model or lack of funding. Future service revenue levels are dependent on
growth in our customer base and customer's deployment resource levels and schedules.

Operating Expenses

Research and development expenses consist principally of salaries and related personnel expenses, consultant fees and the cost of hardware and software used in
product development. Research and development costs are expensed to operations as incurred. Research and development expenses increased 70% to $13,393 in 2000 from $7,882 in 1999. The increase is
primarily attributable to increases in salaries and related personnel expenses, consultant fees and facilities costs as we expanded our platform to support multiple digital goods. In addition, royalty
fees increased due to the licensing of certain technology for the distribution of music also contributed to the increase. We believe that continuing investments in research and development are
critical to developing our software and music solutions. However, due to our recent reduction in force and other cost reduction measures, we expect research and development expense to decrease in
future periods.

Sales
and marketing expenses consist of salaries and related expenses for personnel engaged in direct sales, partner development and marketing. In addition, these costs include
consultant fees, promotional materials and trade show exhibits and other marketing program expenses. Sales and marketing expenses increased 86% to $13,530 in 2000 from $7,289 in 1999. The increase is
primarily attributable to increases in salaries and related personnel expenses, recruiting costs and facilities costs resulting from the expansion of our sales force to support our growing customer
base, as well as the growth in our marketing efforts as we expanded our platform to address multiple digital goods. A significant portion of our recent cost reductions were in the areas of sales and
marketing as we chose to reduce spending in this area reflecting the overall slower growth we expect in the market.

General
and administrative expenses consist primarily of salaries and related expenses for executive, legal, accounting and administrative personnel, professional services and general
corporate expenses. General and administrative expenses increased 40% to $4,446 in 2000 from $3,169 in 1999. The increase is primarily a result of increases in salaries and related costs, consultants
and facilities costs. The increase was partially offset by a decrease in legal costs. Legal costs were higher in 1999 as a result of litigation related expenses. We expect general and administrative
costs to decline in the near term due to our recent cost cutting measures.

Stock
based compensation of $3,945 in 2000 relates to the issuance of common stock warrants and options to non-employees or to employees at below the fair market value of
the Company's common stock. Stock based compensation for 2000 includes $1,364 related to the vesting of a portion of a warrant issued to Virgin Holdings, Inc. based on achievement of
pre-determined performance criteria related to market development activities. The final 133 shares of this warrant did not vest as scheduled in 2000, as pre-determined
performance criteria were not met. The $804 of stock based compensation in 1999 primarily related to the warrant issued to Virgin Holdings, Inc. discussed above.

Acquisition
related costs, which totaled $2,706 in 2000 and $2,076 in 1999 include the amortization of patents and other intangibles. In addition, the 2000 amount includes $720, which
represents expenses incurred in evaluating various strategic alternatives for the company.

27

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Income Taxes

We have incurred net losses since inception for federal and state tax purposes and have not recognized any tax provision or benefit. As of December 31,
2000, we had approximately $53,000 of federal and state net operating loss carryforwards to offset against future taxable income. The federal net operating loss and tax credit carryforwards expire on
various dates through 2020, if not used. The state net operating loss carryforwards expire on various dates through 2015, if not used. Utilization of net operating losses and credits is subject to a
substantial annual limitation due to the change in ownership provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization.

We
are in a net deferred tax asset position, which has been fully reserved. We will continue to provide a valuation allowance for our net deferred tax assets until it becomes more
likely than not, in our assessment, that our net deferred tax assets will be realized.

Interest Income

Interest income increased to $6,014 in 2000 from $798 in 1999 as a result of higher average cash and investment balances, which resulted primarily from our
initial public offering of common stock in December 1999. In addition, interest rates were higher in 2000 compared to 1999, however, they have declined in the first quarter of 2001. We expect
interest income in the coming quarters to decline as cash and investment balances are used for operations.

Results of Operations

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Revenue

Total revenues were $3,483 for the year ended December 31, 1999 compared to $610 for the year ended December 31, 1998.

Network
transaction fees were $2,328 in 1999 compared to $435 in 1998. The increase in network transaction fees resulted from growth in our customer base and growing market acceptance
of electronic distribution of digital content. This growth, in turn, resulted from increased sales and marketing efforts subsequent to the Portland Software merger. Sony Marketing and Ingram Micro
accounted for $532 and $177 of the increase, respectively. During 1999, we continued to build our customer network, signing contracts with new distributors, publishers, and resellers. In addition,
during the year, several of our customers began commercial transactions using our solution.

Service
revenues were $1,155 in 1999 compared to $175 in 1998. Approximately $350 of the increase in service revenues was the result of training and consulting services performed for
Sony Marketing and Ingram Micro in connection with their agreements. The remainder of the increase resulted from training and consulting services to an expanding customer base.

Operating Expenses

Research and development expenses were $7,882 in 1999 compared to $3,657 in 1998. Approximately $1,250 of the increase in research and development expenses
resulted from inclusion of the operations of Portland Software for the full year in 1999. In addition, increased headcount accounted for approximately $2,100 of the increase. During 1999, we expanded
our platform to support multiple digital goods and include full multi-lingual support for both Windows and Mac platforms. In addition, we expanded our service engineering capabilities to support
integration into our customer environments.

28

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Sales and marketing expenses were $7,289 in 1999 compared to $3,368 in 1998. Approximately $900 of the increase was related to inclusion of the operations of Portland Software for the
full year in 1999. Increased headcount during 1999 accounted for approximately $1,200 of the increase. In addition, advertising and other marketing program costs increased approximately $650 during
1999 compared to 1998.

General
and administrative expenses were $3,169 in 1999 compared to $1,960 in 1998. Approximately $325 of the increase related to inclusion of the operations of Portland Software for
the full year of 1999. In addition, approximately $500 of the increase related to increased headcount during the year and approximately $275 related to increased legal costs in 1999 compared to 1998.

Stock
based compensation relates to the issuance of common stock warrants and options either below the fair market value of the Company's common stock or to non-employees.
The $804 of stock based compensation in 1999 primarily relates to the warrant issued to Virgin Holdings, Inc. discussed above.

Acquisition
related costs consist of the amortization of patents and other intangibles and in-process research and development acquired in connection with the Portland
Software merger. Acquisition related costs were $2,076 in 1999 compared to $2,957 in 1998. The $2,076 of costs in 1999 relate to the amortization of intangibles. Amortization of intangibles in 1998
was $866. The remainder of the 1998 acquisition related costs represent the write-off of in-process research and development as a result the Portland Software merger.

Other

Inflation did not have a material impact on the results of operations in 2000, 1999 or 1998.

Seasonality and Quarterly Results of Operations

Due to our limited operating history, we are unsure what effect, if any, the seasonal nature of our customers' business will have on our quarterly results of
operations.

Liquidity and Capital Resources

We completed our initial public offering of common stock in December 1999, raising $71,243, net of offering expenses. In January 2000, the
underwriters of our initial public offering exercised their over-allotment option, resulting in the sale of an additional 570 shares of common stock for net
proceeds of $11,118. Prior to our initial public offering, we financed our operations primarily through the sale of preferred stock, raising $39,699 in a series of offerings.

On
December 31, 2000, we had working capital of $78,268, including $40,432 of cash and cash equivalents and $38,033 of short-term investments. We used $19,276 for
operations during the year ended December 31, 2000 compared to $14,534 in 1999. We also used $20,755 for the net purchase of short and long-term investments during 2000.
Long-term investments include $1,000 related to highly liquid investments with maturities beyond 12 months, but less than 24 months from December 31, 2000. Another
$935 of the long-term investments relate to equity investments in licensees, as more fully described in Note 1 to the financial statements.

We
have a $5,000 line of credit with Silicon Valley Bank, which matures August 4, 2001 and is collateralized by all assets except cash, highly liquid investments, and
intellectual property. The line of credit will be used for short-term working capital requirements and will allow us to issue letters of credit or enter into foreign exchange contracts as
necessary to hedge any possible future foreign currency exposures. At December 31, 2000, we did not have any amounts outstanding under this line of credit.

29

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Current and long-term accounts receivable were $4,741 and $300, respectively, at December 31, 2000 compared to current accounts receivable of $2,229 at
December 31, 1999. The increase was primarily attributable to the execution of new licensing agreements with customers. Days sales outstanding at December 31, 2000 was 234 compared to
167 at December 31, 1999. This increase is primarily due to our revenue recognition policy, which requires us to record the full amount of a new contract as accounts receivable while we
amortize revenue over the contract period. In addition, we generally book the full value of multi-year agreements as accounts receivable and deferred revenue, resulting in a large portion
of our accounts receivable balance which are not contractually due to be paid as of the balance sheet date. These amounts are fully offset by deferred revenue. Excluding the amounts not contractually
due results in days sales outstanding of 100 and 126 days as of December 31, 2000 and 1999, respectively. During 2000, several customers became delinquent in their obligations to us and,
in some instances, we have initiated the collection procedures provided for in our agreements. In addition, we ceased recognizing any remaining deferred revenue associated with these accounts until
collectibility becomes probable. At December 31, 2000, we believe that our allowance for doubtful accounts is adequate.

Deferred
revenue increased $1,313, or 52%, to $3,856 at December 31, 2000 from $2,543 at December 31, 1999. The increase is primarily attributable to the execution of
new licensing agreements with customers. However, $460 of deferred revenue was reclassified to accrued liabilities in December 2000 due to the termination of the Sony Marketing license
agreement. Deferred revenue represents unamortized revenue, which in accordance with our revenue recognition policy, is amortized
over the contract period. Current deferred revenue at December 31, 2000 was $2,993 compared to $1,916 at December 31, 1999.

We
believe that cash on hand will be sufficient to meet our working capital needs through at least the next 12 months. Thereafter, we may require additional funds to support
our working capital needs or for other purposes and may seek to raise additional funds through public or private equity financing or from other sources. Additional financing may not be available at
all or, if available, may not be obtainable on terms favorable to us. In addition, any financing may be dilutive to our stockholders. If we raise additional funds through the issuance of debt
securities, holders of these securities could have rights, preferences and privileges senior to holders of common stock, and the terms of this debt could impose restrictions on our operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We develop products in the United States and make agreements with customers in North America, Europe, and Asia. As a result, our financial results could be
adversely affected by various factors, including foreign currency exchange rates or weak economic conditions in foreign markets. Network transaction fees from our European and Asian partners will be
primarily denominated in foreign currencies and generally translated on a monthly basis to U.S. dollars to determine the amount of fees we are due. As a result, we could be affected adversely by
fluctuations in foreign currency exchange rates.

Our
exposure to market risk for changes in interest rates is limited to the exposure related to our debt instruments and credit facilities, which are tied to market rates. We do not
plan to use derivative financial instruments in our investment portfolio. We plan to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk, and
reinvestment risk. We plan to mitigate default risk by investing in high credit quality securities.

30

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Item 8. Financial Statements and Supplementary Financial Data

The financial statements and notes thereto required by this item begin on page F-1 of this document, as listed in Item 14 of Part IV.
Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2000 appears as follows:

|In thousands, except per share data  |                          | 1st Quarter    |        | 2nd Quarter |       | 3rd Quarter |       | 4th Quarter |       
|------------------------------------ | ------------------------ | -------------- | ------ | ----------- | ----- | ----------- | ----- | ----------- | ------
|1999                                 |                          |                |        |             |       |             |       |             |       
|Revenues:                            |                          |                |        |             |       |             |       |             |       
|                                     | Network transaction fees |                | $      | 295         |       | $           | 447   |             | $     
|                                     | Services                 |                |        | 168         |       |             | 311   |             |       
|                                     |                          |                |        |             |       |             |       |             |       
|                                     |                          | Total revenues |        |             | 463   |             |       | 758         |       
|Operating expenses                   |                          |                | 4,069  |             |       | 4,591       |       |             | 5,373 
|                                     |                          |                |        |             |       |             |       |             |       
|Loss from operations                 |                          |                | (3,606 | )           |       | (3,833      | )     |             | (4,330
|Other income (expense), net          |                          |                | 28     |             |       | (25         | )     |             | 246   
|                                     |                          |                |        |             |       |             |       |             |       
|Net loss                             |                          | $              | (3,578 | )           | $     | (3,858      | )     | $           | (4,084
|                                     |                          |                |        |             |       |             |       |             |       
|Basic and diluted net loss per share |                          | $              | (1.33  | )           | $     | (1.42       | )     | $           | (1.32 
|                                     |                          |                |        |             |       |             |       |             |       
|2000                                 |                          |                |        |             |       |             |       |             |       
|Revenues:                            |                          |                |        |             |       |             |       |             |       
|                                     | Network transaction fees |                | $      | 1,235       |       | $           | 2,055 |             | $     
|                                     | Services                 |                |        | 434         |       |             | 350   |             |       
|                                     |                          |                |        |             |       |             |       |             |       
|                                     |                          | Total revenues |        |             | 1,669 |             |       | 2,405       |       
|Operating expenses                   |                          |                | 10,140 |             |       | 9,275       |       |             | 8,631 
|                                     |                          |                |        |             |       |             |       |             |       
|Loss from operations                 |                          |                | (8,471 | )           |       | (6,870      | )     |             | (6,789
|Other income, net                    |                          |                | 1,424  |             |       | 1,603       |       |             | 1,399 
|                                     |                          |                |        |             |       |             |       |             |       
|Net loss                             |                          | $              | (7,047 | )           | $     | (5,267      | )     | $           | (5,390
|                                     |                          |                |        |             |       |             |       |             |       
|Basic and diluted net loss per share |                          | $              | (0.42  | )           | $     | (0.31       | )     | $           | (0.31 
|                                     |                          |                |        |             |       |             |       |             |       

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Directors of the Company

The Company's directors and their ages as of March 21, 2001 are as follows:

Name

AgeBruce R. Bourbon(2)

59Gerard H. Langeler(2)

50Donald L. Lucas(1)

71Vincent Pluvinage

42R. Douglas Rivers(1)

44Jo Ann Heidi Roizen(1)(2)

43


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Set
forth below is certain biographical information for each director of the Company. There are no family relationships between any of the Board members or executive officers of the
Company.

Bruce R. Bourbonhas served as a director of Preview Systems since the merger of Preview Software and Portland Software in
August 1998 and, prior to that, served as a director of Preview Software beginning in 1997. Mr. Bourbon is currently a Managing General Partner of Telos Venture Partners, a venture
capital investment fund, where he has been a general partner since December 1995. From 1994 to 1995, Mr. Bourbon was an independent management consultant. From 1990 to 1994, he was
President and Chief Executive Officer of Vertex Semiconductor, a high-end ASIC gate arrays company. From 1991 to 1994, Mr. Bourbon was Vice President of Marketing for Toshiba
America, an electronic component provider. From 1987 to 1990, Mr. Bourbon served as Vice President of Marketing at Cadence Design Systems, a software company. He currently serves as a director
for CareThere, Inc., Citadon, Inc., Extricity Software, Inc., Integrated Memory Logic, Intensys Corporation, iReady Corporation and nQuire Software, Inc., all privately
held companies. He holds a B.S. degree in Electrical Engineering from California State Polytechnic University and an M.S. degree in Electrical Engineering from University of California, Los Angeles.

Gerard H. Langelerhas served as Chairman of the Board of Directors of Preview Systems since the merger of Preview Software and
Portland Software in August 1998 and, prior to that, served as a director of Portland Software beginning in 1996. Since 1992, he has been a General Partner with Olympic Venture Partners, a
venture capital investment firm. Prior to joining Olympic Venture Partners, he was a co-founder of Mentor Graphics Corporation, a software company, where he served in a number of roles
from 1981 to 1992, including President and Chief Operating Officer. He currently serves as a director for 800.com, Captivate Networks, Webridge, and Djangos, all privately-held companies,
as well as Vascular Solutions, a public company. Mr. Langeler holds an A.B. degree in Chemistry from Cornell University and an M.B.A. degree from Harvard Business School.

Donald L. Lucashas served as a director of Preview Systems since the merger of Preview Software and Portland Software in
August 1998 and, prior to that, served as a director of Preview Software beginning in 1997. Since 1967, Mr. Lucas has been involved in venture capital activities as a private individual.
Mr. Lucas currently serves as a director for Cadence Design Systems, Inc., Macromedia, Inc., Oracle Corporation, Transcend Services, Inc. and Tricord Systems, Inc.,
all publicly-held companies. Mr. Lucas also serves as a director for several privately held companies. He holds a B.A. degree in Economics and an M.B.A. degree from Stanford
University.

32

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Vincent Pluvinage, President, Chief Executive Officer and Director, joined Preview Software in June 1997 and has been with
Preview Systems since the merger of Preview Software and Portland Software in August 1998. Prior to joining Preview Software, Dr. Pluvinage led the research and development,
international operations, business development and strategic marketing efforts for ReSound Corporation, a developer of advanced hearing technologies, where he held a variety of senior management
positions from March 1987 to May 1997. From June 1985 to March 1987, Dr. Pluvinage was a member of the technical staff at AT&T Bell Labs, a developer of advanced
communication products, and participated in the spin-off of technologies from AT&T Bell Labs to ReSound. Dr. Pluvinage completed the Advanced Executive Management program at
Stanford University and holds a Ph.D. degree in Bioengineering from the University of Michigan and an M.S. degree, summa cum laude, in Applied Physics Engineering from the Universite Catholique de
Louvain in Belgium.

R. Douglas Rivershas served as a director of Preview Systems since the merger of Preview Software and Portland Software in
August 1998 and, prior to that, served as Chairman of Preview Software beginning in 1996. Dr. Rivers is co-founder and Chief Executive Officer of Knowledge Networks, a
provider of Internet-based market research services. Dr. Rivers was a co-founder and Partner at Pacific Economics Group, an economic consulting firm, from 1997 to 1998, and a Senior
Economist at Arthur Andersen LLP, an accounting firm, from 1992 to 1997. Since 1989, Dr. Rivers has been a Professor of Political Science at Stanford University and, since 1994, a Senior Fellow
at the Hoover Institution. From 1987 to 1989, Dr. Rivers was an Associate Professor of Political Science at University of California, Los Angeles. From 1983 to 1987, Dr. Rivers was an
Assistant Professor of Political Science at the California Institute of Technology. From 1980 to 1983, Dr. Rivers was an Assistant Professor of Government at Harvard University.
Dr. Rivers holds a Ph.D. degree in Political Science and Economics from Harvard University and a B.A. degree in Political Science from Columbia University.

Jo Ann Heidi Roizenhas served as a director of Preview Systems since the merger of Preview Software and Portland Software in
August 1998 and, prior to that, served as a director of Preview Software beginning in 1997. Ms. Roizen is Managing Director of SOFTBANK Technology Ventures, a venture fund focused on
early stage Internet companies. Prior to joining SOFTBANK in April 1999, Ms. Roizen was a consultant to numerous technology companies, including Mircrosoft, Intel and Compaq. From 1996
to 1997, she was Vice President of Worldwide Developer Relations for Apple Computer, a computer manufacturer. From 1983 to 1996, she was CEO of T/Maker Company, a software developer and publisher.
Ms. Roizen serves as a director for Great Plains and iPrint.com, both public companies. She also serves as a director for several privately held companies, is an advisory board member of Time
Domain Corporation and Garage.com, and is a member of the Stanford Board of Trustees Nominating Committee. Ms. Roizen is a past president of the Software Publishers' Association and has served
as a Public Governor of the Pacific Exchange. Ms. Roizen holds a B.A. degree in English and an M.B.A. degree from Stanford University.

33

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Executive Officers of the Company

The Company's executive officers, their ages and the positions they held as of March 21, 2001 are as follows:

|Name               |  | Age |  | Position                                                     
|------------------ |  | --- |  | -------------------------------------------------------------
|Vincent Pluvinage  |  | 42  |  | President, Chief Executive Officer and Director              
|Murali Dharan      |  | 39  |  | Executive Vice President                                     
|Jeffrey E. Brown   |  | 32  |  | Vice President, Professional Services                        
|Michael W. Davison |  | 43  |  | Vice President, Operations and Planning                      
|Luke H. Hohmann    |  | 36  |  | Vice President, Engineering                                  
|Lillian Maremont   |  | 65  |  | Vice President, Human Resources                              
|David C. Martin    |  | 35  |  | Vice President, North American Sales                         
|Patrick G. Reutens |  | 42  |  | Vice President, Strategic Licensing and Intellectual Property
|Roger Rowe         |  | 39  |  | Vice President and Chief Financial Officer                   
|Edward J. Wholihan |  | 41  |  | Vice President, Business Development                         

For
information on the business background of Mr. Pluvinage see "Directors of the Company" above.

Murali Dharan,Executive Vice President, joined Preview Systems in March 2000. Prior to joining the Company, Mr. Dharan
was Vice President and General Manager for the Broadband Internet Solutions Division at Silicon Graphics, Inc., a computer systems manufacturer, from July 1999 to October 1999.
Mr. Dharan also held the position of Vice President of Marketing for the Workstation Division at Silicon Graphics from March 1998 to July 1999. Prior to this, Mr. Dharan
was Vice President and General Manager for the Network Attached Storage Business Unit at Quantum Corporation, a computer hardware and storage company, from August 1997 to March 1998.
Prior to this, Mr. Dharan managed the Consumer and Commercial Desktop PC Business Unit at NEC Computer Systems Division, a computer hardware company, from August 1994 to
August 1997, as well as serving as Vice President of Enterprise Marketing. Mr. Dharan holds a M.S. degree in Computer Science from Indiana University and a M.B.A. degree from Stanford
University.

Jeffrey E. Brown, Vice President, Professional Services, joined Preview Systems in July 1999. Prior to joining the Company,
Mr. Brown was with Andersen Consulting, a business consulting firm, from November 1991 to July 1999, most recently serving as a Senior Manager. From 1996 through 1999,
Mr. Brown managed an Andersen Consulting Internet solution center, where he was responsible for delivering large-scale e-commerce solutions for companies. Mr. Brown holds a
B.S. degree in Mathematics from the University of Washington.

Michael W. Davison, Vice President, Operations and Planning joined Preview Software in March 1998 and has been with Preview
Systems since the merger of Preview Software and Portland Software in August 1998. Prior to joining Preview Software, Mr. Davison was the Director of Strategic Marketing at Claris
Corporation, a software company, from 1992 to 1998, where he was responsible for development and implementation of Claris' online marketing and electronic commerce strategies. From 1990 to 1992, he
served as Imaging Market Manager for Informix Software, a relational database supplier. Mr. Davison has also held business development and marketing management positions at several
start-up companies in the technology industry. Mr. Davison was chairman of the Software Publishers' Association's, Electronic Software Distribution Committee and a member of the SPA
Internet Section Board. Mr. Davison holds a B.A. degree in History from the University of California at Berkeley, and an M.B.A. degree from Santa Clara University.

Luke H. Hohmann, Vice President, Engineering joined Preview Systems in December 2000. Prior to joining the Company,
Mr. Hohmann was Vice President, Engineering & Product Development at Aurigin Systems, Inc., a software company, from 1996 to 2000, where he was primarily responsible for

34

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technical product strategy and development. From 1994 to 1996, he served as Education Technical Director at ObjectSpace, Inc., a consulting company. Mr. Hohmann holds a B.S.E. degree in
Computer Engineering and an M.S.E degree in Computer Science & Engineering from the University of Michigan.

Lillian Maremont, Vice President, Human Resources joined Preview Systems in September 2000. From 1997 through 2000, she
consulted for several clients, ranging in size from start-ups to Fortune 500 companies and spanning industries from pharmaceuticals to high technology. Prior to working as a consultant,
Ms. Maremont spent nine years as Vice President of Human Resources for Visa International where she led the development of Visa's worldwide human resources organization. Previously, she served
as a Director of Human Resources at Bank of America, initially managing the human resource activities for the Electronic Banking Group and later leading all management and executive development.
Ms. Maremont earned a B.S. degree and has completed graduate work at the University of California, Berkeley.

David C. Martin, Vice President, North American Sales joined Preview Systems in March 1999, as the Director of North American
Sales. Prior to joining the Company, Mr. Martin was a Sales Manager at Tivoli Systems and Sybase, Inc., both software companies, from June 1997 to March 1999 and from
June 1995 to June 1997, respectively, where he was responsible for managing the western area sales teams. Mr. Martin holds a B.S. degree in Computer Science from California
Polytechnic State University.

Patrick G. Reutens, Vice President, Strategic Licensing and Intellectual Property, joined the Company in October 1999. From
November 1998 to October 1999, Dr. Reutens was responsible for licensing microprocessor instruction set architectures and cores at MIPS Technologies. From 1991 to 1998,
Dr. Reutens was a Technology Lawyer at two Silicon Valley law firms, Wilson, Sonsini, Goodrich & Rosati and Venture Law Group. Dr. Reutens holds a B.Sc. degree in Physics from the
University of Western Australia, a Ph.D. in Physics from the University of Chicago and a J.D. from Yale Law School. Mr. Reutens is a member of the California Bar and the U.S. Patent Bar.

Roger Rowe, Vice President and Chief Financial Officer, joined Preview Systems in October 1999 as Vice President and Corporate
Controller. Mr. Rowe was promoted to Chief Financial Officer in March 2001. From June 1998 to October 1999, Mr. Rowe held several positions at North Pacific Group, a
wholesale trading and distribution company, with his most recent position being Vice President. Prior to this, Mr. Rowe spent 10 years in a variety of management capacities with Mentor
Graphics Corporation, a software company. Mr. Rowe is a Certified Public Accountant and holds a B.S. degree in Finance and Accounting from the University of Idaho.

Edward J. Wholihan, Vice President, Business Development, joined Portland Software in August 1996 and has been with Preview
Systems since the merger of Preview Software and Portland Software in
August 1998. Prior to joining Portland Software, he was employed by McKinsey and Company, a management consulting firm, from 1989 to 1996, where he most recently served as Senior Engagement
Manager, developing and implementing marketing, operational, and financial strategies. Mr. Wholihan holds a B.A. degree in Economics from Yale University and an M.B.A. degree from Stanford
University.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the 1934 Act requires the Company's directors and executive officers and persons who own more than ten percent of the outstanding
shares of the Company's common stock (collectively, the "Reporting Persons"), to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of
common stock and other equity securities of the Company. Officers, Directors and greater than ten percent stockholders are required by regulations of the SEC to furnish the Company copies of all
Section 16(a) forms they file.

35

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To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company or otherwise in its files and on written representations from certain
Reporting Persons, all Directors, officers and greater than ten percent beneficial owners met all applicable filing requirements during the last fiscal year, except that Mr. Halaby, a former
officer of the Company, and Mr. Hohmann, an officer of the Company, each filed one late Form 3, Initial Statement of Beneficial Ownership.

Item 11. Executive Compensation

Summary of Cash and Certain Other Compensation

The following table sets forth all compensation awarded to, earned by, or paid to our chief executive officer and each of our other four most highly
compensated executive officers, each of whose total cash compensation exceeded $100,000 during fiscal year 2000.

Summary Compensation Table

|                                                                                    |  |                |  | Annual Compensation |                         | Long-Term
Compensation
Awards |   |                
|----------------------------------------------------------------------------------- |  | -------------- |  | ------------------- | ----------------------- | ----------------------------- | - | ---------------
|
|Vincent Pluvinage
President and Chief Executive                                     |  | 2000
1999
1998 |  | $                   | 204,000
178,333
162,056 |                               | $ | 
49,680
20,000
|Michael J. Pinkman
Former Vice President, Worldwide Sales(2)                        |  | 2000
1999      |  |                     | 150,000
33,558          |                               |   | 83,125
28,438  
|Murali Dharan
Executive Vice President(3)                                           |  | 2000           |  |                     | 162,949                 |                               |   | 50,000         
|G. Bradford Solso
Former Chief Operating Officer and
Chief Financial Officer(4)     |  | 2000
1999      |  |                     | 186,641
78,256          |                               |   | 
19,563       
|Patrick G. Reutens
Vice President, Strategic Licensing
And Intellectual Property(5) |  | 2000
1999      |  |                     | 160,000
29,128          |                               |   | 48,000
32,282  

---

36

---

Stock Options

The following table contains information concerning the grant of stock options under the Company's stock option plans to the named executive officers in 2000.

Option Grants in Last Fiscal Year

|                     |  |                       |  |                |   |   |                     |  |                            | Potential
Realizable Value
At Assumed Annual
Rates of Stock Price
Appreciation for
Option Term(1)
|-------------------- |  | --------------------- |  | -------------- | - | - | ------------------- |  | -------------------------- | -------------------------------------------------------------------------------------------------
|
|
|
|Vincent Pluvinage    |  |                      |  |               |   |   |                    |  |                           |                                                                                                  
|Michael J. Pinkman   |  |                      |  |               |   |   |                    |  |                           |                                                                                                  
|Murali Dharan(2)     |  | 225,000
65,000
50,000 |  | 9.81
2.83
2.18 | % | $ | 31.500
0.100
12.563 |  | 04/10/10
04/10/10
06/20/10 |                                                                                                  
|G. Bradford Solso(3) |  | 100,000               |  | 4.36           |   |   | 12.563              |  | 06/20/10                   |                                                                                                  
|Patrick G. Reutens   |  |                      |  |               |   |   |                    |  |                           |                                                                                                  

---



37

---

Option Exercises and Holdings

The following table provides information concerning the exercise of options during 2000 and unexercised options held as of the end of the fiscal year, with
respect to the named executive officers.

Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values

|Name               |  | Shares
Acquired
On Exercise
(#) |  | Value
Realized
($) |  | Number of Securities Underlying Unexercised Options At FY-End (#) Exercisable/ Unexercisable |  | Value of Unexercised In-The-Money Options
At FY-End ($)(1)
Exercisable/
Unexercisable
|------------------ |  | ------------------------------- |  | ------------------ |  | -------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|Vincent Pluvinage  |  |                                |  |                   |  | 133,333                                                                                      |  | 266,667                                                                              
|Michael J. Pinkman |  |                                |  |                   |  | 43,750                                                                                       |  | 106,250                                                                              
|Murali Dharan      |  |                                |  |                   |  | 20,000                                                                                       |  | 320,000                                                                              
|G. Bradford Solso  |  |                                |  |                   |  | 31,253                                                                                       |  | 218,747                                                                              
|Patrick G. Reutens |  |                                |  |                   |  | 40,833                                                                                       |  | 99,167                                                                               

---

Director Compensation

None of the Company's directors are paid any fee or other compensation for acting as a director, although directors are reimbursed for reasonable expenses
incurred in attending board or committee meetings. Directors who are also employees of the Company are eligible to participate in our 1998 Stock Option Plan, our 1999 Executive Stock Option Plan and
our 1999 Employee Stock Purchase Plan. Directors who are not employees of the Company are eligible to participate in our 1999 Directors' Stock Option Plan (the "Directors' Plan").

The
Directors' Plan provides that each person who becomes a non-employee director of the Company after the completion of its initial public offering will be granted a
nonstatutory stock option to purchase 20,000 shares of common stock on the date on which the individual first becomes a member of the Board of Directors of the Company. Thereafter, on the date of each
annual meeting of the Company's stockholders at which such director is elected, each such non-employee director shall be granted an additional option to purchase 10,000 shares of common
stock if, on such date, he or she shall have served on the Company's Board of Directors for at least six months. Each of the nominees for director will have served for more than six months at the time
of the Annual Meeting, and so will receive options to purchase 10,000 shares of the Company's common stock under the Directors' Plan if they are reelected to the Board at the Annual Meeting. All stock
options granted under the Directors' Plan shall have an exercise price equal to the fair market value of the Company's common stock on the date of grant and shall be exercisable in full immediately
upon grant.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

We have entered into arrangements with certain of the officers listed in the Summary Compensation Table, which provide them with certain benefits in the event
of a change of control and/or termination of the respective officer's employment. A change of control is generally defined as the acquisition of a majority of our stock or sale of substantially all of
our assets.

38

---



Under
our arrangement with Dr. Pluvinage, Mr. Dharan and Dr. Reutens, in the event of a change of control, 50% of their unvested options under our stock option
plans shall become fully vested if, within 90 days of the change of control, they are terminated without cause or experience a material reduction in their responsibilities. At
December 31, 2000, this change of control applies to options to purchase 266,667, 313,750 and 99,167 shares of our common stock, respectively.

Under
our arrangement with Dr. Pluvinage, in the event of a change of control, 50% of the unvested options granted to Dr. Pluvinage under the Preview Software 1997 plan
will immediately vest at the time of the change of control. In addition, if the acquiring company fails to assume or does not provide Dr. Pluvinage with options of equivalent value, the
remaining 50% of the unvested options will also immediately vest. This change in control applies to 250,000 shares of our common stock. Moreover, in the event that Dr. Pluvinage is terminated
for any reason other than for cause or his own willful termination, 50% of his unvested options under the Preview Software 1997 plan will immediately vest and he will receive a cash amount equal to
one year's base salary.

Under
our arrangement with Mr. Dharan, in the event that his employment is involuntarily terminated without cause prior to his one year anniversary with the Company, or if he
resigns within 30 days of a material reduction in his duties, authority and responsibilities with the Company, he will be entitled to a severance benefit equal to the continuation of his base
salary for a period of one year.

Under
our arrangement with Dr. Reutens, if he continues his employment with the Company through June 30, 2001 or is terminated prior to that time without cause, he will
receive a lump sum payment equal to three months salary plus 25% of his annual bonus. In the event he is terminated without cause, and other than on account of his commencement of employment with an
acquiring company, he will receive a second lump sum payment of equal value and the Company will vest 50% of his unvested options as of his termination date.

On
March 20, 2001, G. Bradford Solso, Chief Operating Officer and Chief Financial Officer resigned. The terms of his severance arrangement are currently being negotiated.

Due
to recent business developments and its announcement to sell all or parts of the business, the Company is currently creating a retention program for certain of its officers,
including Dr. Pluvinage and Mr. Dharan.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of March 21, 2001, certain information furnished to the Company with respect to ownership of the Company's common
stock of (i) each Director, (ii) the "named executive officers" (as defined under "Executive Compensation"), (iii) all persons known by the

39

---

Company to be beneficial owners of more than 5 percent of its common stock, and (iv) all current executive officers and Directors as a group.

|                                                                                            |  | Common Stock | 
|------------------------------------------------------------------------------------------- |  | ------------ | 
|
|J P Morgan & Co., Inc.(4)
60 Wall Street
New York, NY 10260                                 |  | 1,678,084    | 
|SOFTBANK Technology Ventures(5)
333 W. San Carlos St., Suite 1225
San Jose, CA 95110        |  | 1,190,476    | 
|Intrinsic Value Asset Management, Inc.(6)
29229 Heathercliff Rd., Suite #5
Malibu, CA 90265 |  | 1,120,600    | 
|Jo Ann Heidi Roizen(5)                                                                      |  | 1,250,059    | 
|Bruce R. Bourbon(7)                                                                         |  | 743,261      | 
|R. Douglas Rivers(8)                                                                        |  | 652,418      | 
|Gerard H. Langeler(9)                                                                       |  | 621,876      | 
|Vincent Pluvinage(10)                                                                       |  | 560,695      | 
|G. Bradford Solso                                                                           |  | 202,891      | 
|Donald L. Lucas(11)                                                                         |  | 177,881      | 
|Murali Dharan                                                                               |  | 112,827      | 
|Michael J. Pinkman                                                                          |  | 95,667       | 
|Patrick G. Reutens                                                                          |  | 55,263       | 
|All current executive officers and directors as a group (15 persons)                        |  | 4,438,683    | 

---

Name

Shares Subject to OptionsJo Ann Heidi Roizen

59,583Bruce Bourbon

20,000R. Douglas Rivers

20,000Gerard H. Langeler

20,000Donald L. Lucas

20,000Vincent Pluvinage

159,374G. Bradford Solso

50,001Murali Dharan

111,042Patrick G. Reutens

52,500Michael J. Pinkman

92,708


Shares Subject to WarrantsR. Douglas Rivers

3,750All current executive officers and directors as a group (options and warrants)

656,043


40

---





Item 13. Certain Relationships and Related Transactions

On October 11, 2000, the Company entered into an agreement to lend $175,000 to the Chief Executive Officer. The agreement was later modified on
March 13, 2001. The modified note receivable is full recourse, unsecured and bears interest at 11% per annum through March 12, 2001 and 6.25% per annum from March 13, 2001 to
maturity. The principal and unpaid interest are due in full on August 15, 2002, however, the note may be prepaid at any time without penalty.

41

---

On February 9, 2001, the Company terminated the employment of Mr. Pinkman, Vice President, Worldwide Sales, without cause, in connection with the Company's reduction in
force. He was paid six months salary pursuant to his employment agreement. Additionally, the Company vested 50% of his unvested options, which covered 51,562 shares of our common stock, as of his
termination date.

On
March 13, 2001, the Company entered into an agreement to lend $225,000 to the Chief Executive Officer. The note receivable is full recourse, unsecured and bears interest at
6.25% per annum. The principal and unpaid interest are due in full on August 15, 2002, however, the note may be prepaid at
any time without penalty. In addition, the Company modified the terms of several previous notes with the Chief Executive Officer. Specifically, the maturity date on four notes aggregating $937,000 was
extended from maturity dates ranging between May 2001 and July 2002 to December 15, 2002.

On
March 20, 2001, G. Bradford Solso, Chief Operating Officer and Chief Financial Officer resigned. The terms of his severance arrangement are currently being negotiated.

Due
to recent business developments and its announcement to sell all or parts of the business, the Company is currently creating a retention program for its officers. Generally, if
the officers continue their employment with the Company through a certain date, or are terminated prior to that time without cause, they will receive a lump sum payment equal to three months salary
plus 25% of their annual bonus. In the event they are terminated without cause, and other than on account of their commencement of employment with an acquiring company, they will receive a second lump
sum payment of equal value and the Company will vest 50% of their unvested options as of their termination date.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Financial Statements and Schedules

The Consolidated Financial Statements, together with the report thereon of Arthur Andersen LLP, are included on the pages indicated below:

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Public Accountants                                                             |  | F-1 
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                         |  | F-2 
|Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998           |  | F-3 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 |  | F-4 
|Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998           |  | F-5 
|Notes to Consolidated Financial Statements                                                           |  | F-6 

There
are no schedules required to be filed with this Form 10-K.

Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended December 31, 2000.

Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

|Exhibit No. |  |                                                                                    
|----------- |  | -----------------------------------------------------------------------------------
|3.1         |  | Sixth Amended and Restated Certificate of Incorporation, as currently in effect.(1)
|3.2         |  | Form of Amended and Restated Bylaws, as currently in effect.(1)                    

42

---

|4     |  | Form of stock certificate.(1)                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1  |  | Form of indemnification agreement.(1)                                                                                                                                                        
|10.2  |  | Portland Software Amended and Restated 1994 Stock Option Plan, including form of stock option agreement.(1)                                                                                  
|10.3  |  | Preview Software 1997 Stock Option Plan, as amended, including form of stock option agreement.(1)                                                                                            
|10.4  |  | Preview Software New 1997 Stock Option Plan, as amended, including form of stock option agreement.(1)                                                                                        
|10.5  |  | Preview Systems 1998 Stock Option Plan, as amended, including form of stock option agreement.(1)                                                                                             
|10.6  |  | Preview Systems 1999 Directors' Stock Option Plan, including form of stock option agreement.(1)                                                                                              
|10.7  |  | Preview Systems 1999 Employee Stock Purchase Plan, including form of subscription agreement.(1)                                                                                              
|10.8  |  | Preview Systems 1999 Executive Stock Option Plan, including form of stock option agreement.(1)                                                                                               
|10.9  |  | Third Amended and Restated Rights Agreement between Preview Systems and certain holders of our securities dated December 3, 1999.(1)                                                         
|10.10 |  | Common stock Purchase Agreement between Preview Systems and Vincent Pluvinage dated July 5, 1999.(1)                                                                                         
|10.11 |  | Common stock Purchase Agreement between Preview Systems and Brad Solso dated July 6, 1999.(1)                                                                                                
|10.12 |  | One Thousand Broadway Building Lease Agreement between Portland Software and One Thousand Broadway Building Limited Partnership dated July 3, 1996.(1)                                       
|10.13 |  | One Thousand Broadway Building First Lease Amendment between Portland Software and One Thousand Broadway Building Limited Partnership dated August 14, 1996.(1)                              
|10.14 |  | First Amendment to One Thousand Broadway Building Lease Agreement between Portland Software and One Thousand Broadway Building Limited Partnership dated November 26, 1996.(1)               
|10.15 |  | Second Amendment to One Thousand Broadway Building Lease Agreement between Portland Software and One Thousand Broadway Building Limited Partnership dated November 9, 1997.(1)               
|10.16 |  | Third Amendment to One Thousand Broadway Building Lease Agreement between Preview Systems, Inc. and One Thousand Broadway Building Limited Partnership effective October 1, 2000.            
|10.17 |  | Sub-Sublease Agreement between Interwoven, Inc. and Preview Systems, Inc. dated as of December 1999.(4)                                                                                      
|10.18 |  | ZipLock ESD System License Agreement between Preview Systems and Ingram Micro Inc. dated June 30, 1999.(1)(2)                                                                                
|10.19 |  | License Agreement between Preview Systems and Sony Marketing of Japan dated as of September 29, 1998.(1)(2)                                                                                  
|10.20 |  | License Termination Agreement between Preview Systems and Sony Marketing of Japan dated as of December 15, 2000.                                                                             
|10.21 |  | Agreement and Plan of Reorganization by and among Preview Systems, Preview Software, Portland Software, Preview Acquisition Corp. and Portland Acquisition Corp. dated as of May 28, 1998.(1)
|10.22 |  | Loan and Security Agreement dated August 4, 2000 between Preview Systems, Inc. and Silicon Valley Bank.(3)                                                                                   
|10.23 |  | Loan Agreement dated October 11, 2000 between Preview Systems, Inc. and Vincent Pluvinage.                                                                                                   

43

---

|10.24 |  | Patrick Reuten's Retention, Severance and Accelerated Vesting Agreement dated March 23, 2001.
|----- |  | ---------------------------------------------------------------------------------------------
|10.25 |  | Mike Pinkman's Termination Letter dated February 6, 2001.                                    
|21    |  | Subsidiaries of Preview Systems, Inc.                                                        
|23    |  | Consent of Arthur Andersen LLP                                                               

---

44

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.

|Date: March 28, 2001 |  | PREVIEW SYSTEMS, INC.
|-------------------- |  | ---------------------
|                     |  | By                   

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated on March 28, 2001:

|Signature                                     |  | Title                                                                                  
|--------------------------------------------- |  | ---------------------------------------------------------------------------------------
|                                              |  |                                                                                        
|/s/DR. VINCENT PLUVINAGEDr. Vincent Pluvinage |  | President, Chief Executive Officer and Director
(Principal Executive Officer)          
|/s/ROGER ROWERoger Rowe                       |  | Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|/s/GERARD H. LANGELERGerard H. Langeler       |  | Chairman of the Board of Directors                                                     
|/s/BRUCE R. BOURBONBruce R. Bourbon           |  | Director                                                                               
|/s/DONALD L. LUCASDonald L. Lucas             |  | Director                                                                               
|/s/DR. R. DOUGLAS RIVERSDr. R. Douglas Rivers |  | Director                                                                               
|/s/JO ANN HEIDI ROIZENJo Ann Heidi Roizen     |  | Director                                                                               

45

---



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Board of Directors and Stockholders of
Preview Systems, Inc.:

We
have audited the accompanying consolidated balance sheets of Preview Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Preview Systems, Inc. and subsidiaries as of
December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.

|Portland, Oregon
January 19, 2001
(except with respect to the matter discussed in
Note 15, as to which the date is March 23, 2001) |  | ARTHUR ANDERSEN LLP
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------------

F-1

---



PREVIEW SYSTEMS, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except per share data)

|                                                                             |                                                                                                 | December 31,                                                              |      
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -----
|
|Assets                                                                       |                                                                                                 |                                                                           |      
|Current assets:                                                              |                                                                                                 |                                                                           |      
|                                                                             | Cash and cash equivalents                                                                       |                                                                           | $    
|                                                                             | Short-term investments                                                                          |                                                                           |      
|                                                                             | Accounts receivable, net of allowance for uncollectible accounts of $232, and $75, respectively |                                                                           |      
|                                                                             | Prepaid expenses                                                                                |                                                                           |      
|                                                                             | Other current assets                                                                            |                                                                           |      
|                                                                             |                                                                                                 |                                                                           |      
|                                                                             |                                                                                                 | Total current assets                                                      |      
|Property and equipment, net of accumulated depreciation of $2,133 and $1,168 |                                                                                                 |                                                                           | 3,129
|Intangibles, net of accumulated amortization of $5,333 and $3,218            |                                                                                                 |                                                                           | 1,902
|Long-term investments                                                        |                                                                                                 |                                                                           | 1,935
|Long-term receivables                                                        |                                                                                                 |                                                                           | 300  
|Other assets                                                                 |                                                                                                 |                                                                           | 207  
|                                                                             |                                                                                                 |                                                                           |      
|                                                                             |                                                                                                 | Total assets                                                              |      
|                                                                             |                                                                                                 |                                                                           |      
|Liabilities and Stockholders' Equity                                         |                                                                                                 |                                                                           |      
|Current liabilities:                                                         |                                                                                                 |                                                                           |      
|                                                                             | Current portion of long-term debt                                                               |                                                                           | $    
|                                                                             | Current portion of capital lease obligations                                                    |                                                                           |      
|                                                                             | Accounts payable                                                                                |                                                                           |      
|                                                                             | Accrued liabilities                                                                             |                                                                           |      
|                                                                             | Deferred revenue                                                                                |                                                                           |      
|                                                                             |                                                                                                 |                                                                           |      
|                                                                             |                                                                                                 | Total current liabilities                                                 |      
|Long-term debt, less current portion                                         |                                                                                                 |                                                                           |     
|Capital lease obligations, less current portion                              |                                                                                                 |                                                                           | 24   
|Deferred revenue, less current portion                                       |                                                                                                 |                                                                           | 863  
|Other liabilities                                                            |                                                                                                 |                                                                           | 184  
|                                                                             |                                                                                                 |                                                                           |      
|                                                                             |                                                                                                 | Total liabilities                                                         |      
|Commitments and contingencies                                                |                                                                                                 |                                                                           |      
|Stockholders' equity:                                                        |                                                                                                 |                                                                           |      
|                                                                             | Preferred stock, $0.0002 per share par value:                                                   |                                                                           |      
|                                                                             |                                                                                                 | Authorized5,000 shares; none issued and outstanding                      |      
|                                                                             | Common stock, $0.0002 per share par value:                                                      |                                                                           |      
|                                                                             |                                                                                                 | Authorized75,000 shares; issued and outstanding 17,257 and 16,207 shares |      
|                                                                             | Additional paid-in capital                                                                      |                                                                           |      
|                                                                             | Stockholder notes receivable                                                                    |                                                                           |      
|                                                                             | Deferred compensation                                                                           |                                                                           |      
|                                                                             | Accumulated comprehensive lossforeign currency translation adjustment                          |                                                                           |      
|                                                                             | Accumulated deficit                                                                             |                                                                           |      
|                                                                             |                                                                                                 |                                                                           |      
|                                                                             |                                                                                                 | Total stockholders' equity                                                |      
|                                                                             |                                                                                                 |                                                                           |      
|                                                                             |                                                                                                 | Total liabilities and stockholders' equity                                |      
|                                                                             |                                                                                                 |                                                                           |      

The accompanying notes are an integral part of these consolidated balance sheets.

F-2

---

PREVIEW SYSTEMS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share data)

|                                      |                            | Year Ended December 31,  |        
|------------------------------------- | -------------------------- | ------------------------ | -------
|
|Revenues                              |                            |                          |        
|                                      | Network transaction fees   |                          | $      
|                                      | Services                   |                          |        
|                                      |                            |                          |        
|                                      |                            | Total revenues           |        
|Operating expenses:                   |                            |                          |        
|                                      | Research and development   |                          |        
|                                      | Sales and marketing        |                          |        
|                                      | General and administrative |                          |        
|                                      | Stock based compensation   |                          |        
|                                      | Acquisition related costs  |                          |        
|                                      |                            |                          |        
|                                      |                            | Total operating expenses |        
|                                      |                            |                          |        
|Loss from operations                  |                            |                          | (30,252
|Other income (expense):               |                            |                          |        
|Interest income                       |                            |                          | 6,014  
|                                      | Interest expense           |                          |        
|                                      | Other, net                 |                          |        
|                                      |                            |                          |        
|                                      |                            | Total other income       |        
|                                      |                            |                          |        
|Net loss                              |                            | $                        | (24,502
|                                      |                            |                          |        
|Basic and diluted net loss per share  |                            | $                        | (1.44  
|                                      |                            |                          |        
|Shares used in per share calculations |                            |                          | 17,022 
|                                      |                            |                          |        

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

F-3

---



PREVIEW SYSTEMS, INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY    (In thousands, except per share amounts)

|                                                                               |                                        | Preferred Stock |     | Common Stock |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       
|------------------------------------------------------------------------------ | -------------------------------------- | --------------- | --- | ------------ | - | - | ------ | ----- | - | - | - | - | ------- | ----- | - | ------ | - | - | ------
|
|
|Balance at December 31, 1997                                                   |                                        | 2,176           |     | $            |  |   | 582    |       | $ |  |   | $ | 5,520   |       | $ | (100   | ) | $ | (95   
|Issuance of Series D preferred stock at $6.68 per share, net of issuance costs |                                        | 299             |     |              |  |   |       |       |   |  |   |   | 1,965   |       |   |       |   |   |      
|Acquisition of Portland Software, Inc.:                                        |                                        |                 |     |              |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       
|                                                                               | Issuance of Series E preferred stock   |                 | 838 |              |   |  |        |      |   |   |  |   |         | 4,190 |   |        |  |   |       
|                                                                               | Issuance of common stock               |                 |    |              |   |  |        | 1,929 |   |   |  |   |         | 3,857 |   |        |  |   |       
|                                                                               | Issuance of stock options and warrants |                 |    |              |   |  |        |      |   |   |  |   |         | 732   |   |        |  |   |       
|Issuance of Series F preferred stock at $5.00 per share, net of issuance costs |                                        | 1,163           |     |              |  |   |       |       |   |  |   |   | 5,685   |       |   |       |   |   |      
|Exercise of common stock options for cash and notes receivable                 |                                        |                |     |              |  |   | 118    |       |   |  |   |   | 61      |       |   | (25    | ) |   |      
|Issuance of common stock for patent rights                                     |                                        |                |     |              |  |   | 55     |       |   |  |   |   | 55      |       |   |       |   |   |      
|Compensation related to issuance of stock options                              |                                        |                |     |              |  |   |       |       |   |  |   |   | 50      |       |   |       |   |   | (50   
|Amortization of deferred compensation                                          |                                        |                |     |              |  |   |       |       |   |  |   |   |        |       |   |       |   |   | 49    
|Net loss                                                                       |                                        |                |     |              |  |   |       |       |   |  |   |   |        |       |   |       |   |   |      
|                                                                               |                                        |                 |     |              |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       
|Balance at December 31, 1998                                                   |                                        | 4,476           |     |              |  |   | 2,684  |       |   |  |   |   | 22,115  |       |   | (125   | ) |   | (96   
|                                                                               |                                        |                 |     |              |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       
|Issuance of Series G preferred stock at $6.72 per share, net of issuance costs |                                        | 4,312           |     |              |  |   |       |       |   |  |   |   | 27,027  |       |   |       |   |   |      
|Issuance of common stock for notes receivable                                  |                                        |                |     |              |  |   | 275    |       |   |  |   |   | 1,787   |       |   | (1,787 | ) |   |      
|Exercise of common stock options and warrants for
cash                         |                                        | 104             |     |              |  |   | 556    |       |   |  |   |   | 2,513   |       |   |       |   |   |      
|Compensation related to issuance of stock options and warrants                 |                                        |                |     |              |  |   |       |       |   |  |   |   | 809     |       |   |       |   |   | (221  
|Amortization of deferred compensation                                          |                                        |                |     |              |  |   |       |       |   |  |   |   |        |       |   |       |   |   | 216   
|Issuance of shares in public offering, net of issuance costs of $8,558         |                                        |                |     |              |  |   | 3,800  |       |   | 1 |   |   | 71,242  |       |   |       |   |   |      
|Conversion of preferred stock to common stock                                  |                                        | (8,892          | )   |              |  |   | 8,892  |       |   | 2 |   |   |        |       |   |       |   |   |      
|Net loss                                                                       |                                        |                |     |              |  |   |       |       |   |  |   |   |        |       |   |       |   |   |      
|                                                                               |                                        |                 |     |              |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       
|Balance at December 31, 1999                                                   |                                        |                |     |              |  |   | 16,207 |       |   | 3 |   |   | 125,493 |       |   | (1,912 | ) |   | (101  
|                                                                               |                                        |                 |     |              |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       
|Exercise of common stock options and warrants                                  |                                        |                |     |              |  |   | 328    |       |   |  |   |   | 571     |       |   |       |   |   |      
|Compensation related to issuance of stock options and warrants                 |                                        |                |     |              |  |   |       |       |   |  |   |   | 5,293   |       |   |       |   |   | (2,825
|Amortization of deferred compensation                                          |                                        |                |     |              |  |   |       |       |   |  |   |   |        |       |   |       |   |   | 1,477 
|Issuance of shares in public offering, net of issuance costs of $852           |                                        |                |     |              |  |   | 570    |       |   |  |   |   | 11,118  |       |   |       |   |   |      
|Issuance of common stock under employee stock purchase plan                    |                                        |                |     |              |  |   | 152    |       |   |  |   |   | 1,017   |       |   |       |   |   |      
|Foreign currency translation adjustment                                        |                                        |                |     |              |  |   |       |       |   |  |   |   |        |       |   |       |   |   |      
|Net loss                                                                       |                                        |                |     |              |  |   |       |       |   |  |   |   |        |       |   |       |   |   |      
|                                                                               |                                        |                 |     |              |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       
|Balance at December 31, 2000                                                   |                                        |                |     | $            |  |   | 17,257 |       | $ | 3 |   | $ | 143,492 |       | $ | (1,912 | ) | $ | (1,449
|                                                                               |                                        |                 |     |              |   |   |        |       |   |   |   |   |         |       |   |        |   |   |       

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

F-4

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PREVIEW SYSTEMS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

|                                                              |                                                                             | Year Ended December 31,                      |                                          
|------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:                         |                                                                             |                                              |                                          
|                                                              | Net loss                                                                    |                                              | $                                        
|                                                              | Adjustments to reconcile net loss to net cash used in operating activities: |                                              |                                          
|                                                              |                                                                             | Depreciation and amortization                |                                          
|                                                              |                                                                             | Other non-cash revenues and expenses         |                                          
|                                                              |                                                                             | Loss on sale of fixed assets                 |                                          
|                                                              |                                                                             | Acquired in-process research and development |                                          
|                                                              |                                                                             | Changes in operating assets and liabilities: |                                          
|                                                              |                                                                             |                                              | Accounts receivable                      
|                                                              |                                                                             |                                              | Prepaid expenses and other current assets
|                                                              |                                                                             |                                              | Long-term assets and other assets        
|                                                              |                                                                             |                                              | Accounts payable                         
|                                                              |                                                                             |                                              | Accrued liabilities                      
|                                                              |                                                                             |                                              | Deferred revenue                         
|                                                              |                                                                             |                                              |                                          
|                                                              |                                                                             |                                              |                                          
|Cash flows from investing activities:                         |                                                                             |                                              |                                          
|                                                              | Purchase of investments                                                     |                                              |                                          
|                                                              | Sales or maturities of investments                                          |                                              |                                          
|                                                              | Acquisition of Portland Software, Inc., net of cash acquired                |                                              |                                          
|                                                              | Shareholder notes receivable                                                |                                              |                                          
|                                                              | Purchases of intangibles                                                    |                                              |                                          
|                                                              | Purchases of property and equipment                                         |                                              |                                          
|                                                              | Proceeds from sale of equipment                                             |                                              |                                          
|                                                              |                                                                             |                                              |                                          
|                                                              |                                                                             |                                              |                                          
|Cash flows from financing activities:                         |                                                                             |                                              |                                          
|                                                              | Borrowings under line of credit, notes payable and long-term debt           |                                              |                                          
|                                                              | Repayments under line of credit, notes payable and long-term debt           |                                              |                                          
|                                                              | Proceeds from obligations under capital leases                              |                                              |                                          
|                                                              | Payment of obligations under capital leases                                 |                                              |                                          
|                                                              | Issuance of preferred stock, net                                            |                                              |                                          
|                                                              | Issuance of common stock in public offering, net of issuance costs          |                                              |                                          
|                                                              | Issuance of common stock pursuant to the exercise of options and warrants   |                                              |                                          
|                                                              | Issuance of common stock pursuant to employee stock purchase plan           |                                              |                                          
|                                                              |                                                                             |                                              |                                          
|                                                              |                                                                             |                                              |                                          
|                                                              |                                                                             |                                              |                                          
|Net increase (decrease) in cash and cash equivalents          |                                                                             |                                              | (31,005                                  
|Cash and cash equivalents:                                    |                                                                             |                                              |                                          
|                                                              | Beginning of period                                                         |                                              |                                          
|                                                              |                                                                             |                                              |                                          
|                                                              | End of period                                                               |                                              | $                                        
|                                                              |                                                                             |                                              |                                          
|Supplemental Disclosure of Cash Flow Information:             |                                                                             |                                              |                                          
|                                                              | Cash paid for interest                                                      |                                              | $                                        
|                                                              | Cash paid for income taxes                                                  |                                              |                                          
|Supplemental Disclosure of Significant Non-Cash Transactions: |                                                                             |                                              |                                          
|                                                              | Issuance of common stock pursuant to notes receivable                       |                                              | $                                        
|                                                              | Assets acquired in exchange for note payable and other obligations          |                                              |                                          

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

F-5

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PREVIEW SYSTEMS, INC. AND SUBSIDIARIES    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    (In thousands, except per share data)

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

The Company

On August 5, 1998, all of the outstanding equity interests of Preview Software, Inc. ("Preview Software") and Portland Software, Inc.
("Portland Software") were merged into Preview Systems, Inc. (the "Company" or "Preview"). In accordance with Accounting Principles Board Opinion No. 16, the stockholders of Preview
Software were determined to be the controlling stockholders of the Company. Accordingly, the merger of Preview Software into the Company was accounted for as a reorganization under common control with
the underlying net assets recorded by the Company at historical cost. The merger of Portland Software into the Company was accounted for using the purchase method. Therefore, the accompanying
consolidated financial statements reflect the operations of Preview Software for all periods presented and reflect the operations of Portland Software since August 5, 1998.

Preview
Systems is a provider of an Internet-based infrastructure solution that enables networks for distribution and licensing of digital goods. The Company's solution links software
publishers and music labels to their channel partners and end-users worldwide, creating an end-to-end electronic distribution chain that manages the
e-commerce of digital goods and associated licensing rights.

Consolidated Statements

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Preview Systems
International, Inc. Preview Systems International, Inc. operates a registered branch in the United Kingdom and Preview Systems KK, a wholly owned Japanese Corporation. All significant
intercompany transactions have been eliminated in consolidation.

Foreign Currencies

Local currencies are the functional currencies of the Company's foreign operations in Japan and the United Kingdom. Assets and liabilities of foreign
operations are translated to U.S. dollars at current rates of exchange. Revenue and expenses are translated using the monthly average exchange rates in effect for the month in which the items occur.
Foreign currency transaction gains and losses, which have been immaterial, are included in other income and expense. Translation adjustments are included as a separate component of stockholders'
equity.

Stock Split and Authorized Capital

On September 14, 1999, the Company authorized a 1 for 2 reverse stock split of its common and preferred stock, effective immediately prior to the
closing of the initial public offering on December 8, 1999. All share and per share amounts have been retroactively adjusted to reflect this stock split. The Board of Directors also amended the
number of authorized shares of common stock to 75,000 shares and the number of shares of preferred stock to 5,000 shares, effective upon the closing of the initial public offering.

Cash, Cash Equivalents and Investments

The Company considers all highly liquid investment securities with an original maturity of three months or less to be cash equivalents. Marketable securities
with maturity in excess of three months, but within one year from the balance sheet date are classified as short-term investments. Marketable

F-6

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securities with maturity in excess of one year from the balance sheet date are classified as long-term investments. The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities(SFAS 115). Marketable securities
are classified as available-for-sale and are recorded at amortized cost, which approximates market value. Material unrealized gains and losses, if any, are included in
stockholders' equity. To date, unrealized holding gains and losses have not been significant. Realized gains and losses on available-for-sale securities are included in
interest income. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis.

Fair Value of Financial Instruments

The Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued
liabilities, capital leases and long-term debt are carried at historical cost, which approximates their fair value.

Advertising

The Company expenses the costs of advertising when such costs are incurred. Advertising expense was $194, $88 and $111 for 2000, 1999 and 1998, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates.

Property and Equipment

Property and equipment are stated at cost. Capitalized leased property is recorded at the lesser of the present value of minimum lease payments or the fair
value of the leased property.

Depreciation
of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the term of the related lease or the estimated useful life of the asset. The estimated useful lives of property and equipment are as follows:

YearsComputer equipment and software

threeFurniture and fixtures

fiveLeasehold improvements

threeCommunications hardware

five


Impairment of Long-lived Assets

The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes criteria for measuring impairment losses of long-lived assets and determining when
such losses should be recognized. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its
carrying amount. The Company has not identified any such impairment losses to date.

F-7

---

Intangible Assets

Intangible assets associated with acquisitions are amortized using the straight-line method over the estimated useful lives of the related assets,
from two to three years. Patents are stated at acquisition cost and are amortized using the straight-line method over three to six years. Detail of Intangibles is as follows:

December 31,2000

1999Patents

$
1,052

$
1,052Acquired technology


5,058


4,533Other intangible assets


1,125


1,1257,235


6,710Less accumulated amortization


(5,333
)

(3,218
)Total

$
1,902

$
3,492


Investments in Licensees

Long-term investments as of December 31, 2000 and 1999 include $935 and $0, respectively, associated with the value of equity investments in
licensees. The equity in these licensees was received as partial consideration for entering into license arrangements with these licensees. These investments were recorded at fair value upon receipt
or vesting of the equity instrument, using the Black-Scholes method, as appropriate, and will be accounted for using the cost method. The carrying value of these investments is reviewed whenever
circumstances occur which indicate that the carrying value may not be recoverable. The value of the investments was recorded as deferred revenue and is being amortized to network transaction fee
revenue over the life of the license arrangement with the licensees.

Revenue Recognition

The Company generally provides rights to use its solution and ongoing customer support (upgrades, enhancements, phone support, patches, etc.) through annual
licensing agreements. These agreements typically require payment of a transaction fee based on a percentage of value of sales that are fulfilled using the Company's solution. Customers typically
commit to annual minimum network transaction fees
that entitle them to fulfill an agreed amount of sales during the term of the agreement. Some or all of the minimum network transaction fees are due upon execution of the agreement. The Company
records deferred revenue and recognizes the minimum network transaction fee on a straight-line basis over the license period. To the extent sales exceed the agreed minimum amount of sales,
the Company recognizes incremental network transaction fees when the amounts due are known.

Service
revenues generally consist of consulting, training and integration fees. Such services are typically billed separately from the network transaction fees and are recognized as
the related services are performed or when contract milestones are achieved.

The
Company entered into a three-year agreement with Sony Marketing of Japan (SMOJ) in September 1998 that provided to SMOJ the exclusive right to use and
sublicense the Company's technology in Japan, including certain future upgrades, enhancements and new products. The agreement also provided for training and support through June 1999. The
Company received upfront payments for the license and services to be performed by the Company. The Company recorded deferred revenue on the upfront fees and is recognizing the license portion on a
straight-line basis over the three-year term of the agreement and the service revenue was recognized as work was performed through June 1999. In addition, the Company
will receive payments from SMOJ based on a percentage of the dollar value of transactions and services performed by SMOJ or its sublicenses utilizing the

F-8

---

Company's technology. These payments are subject to annual minimum network transaction fees beginning April 1, 1999. On December 15, 2000, the Company entered into a termination
agreement with SMOJ effective March 31, 2001, one year earlier than previously agreed. The Company has agreed to pay SMOJ $460 on March 31, 2001, which essentially is a
pro-rated refund of the original license fee. This amount has been reclassified to accrued liabilities from deferred revenue in the accompanying consolidated balance sheet as of
December 31, 2000.

Software Development Costs

Development costs related to software products are expensed as incurred until technological feasibility of the product has been established. Based on the
Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point
at which the product is ready for general release have not been significant, and, accordingly, no costs have been capitalized.

Income Taxes

The Company is in a net deferred tax asset position and has generated net operating losses to date. Accordingly, no provision for or benefit from income taxes
has been recorded in the accompanying consolidated statements of operations. The Company will continue to provide a valuation allowance for its net deferred tax assets until it becomes more likely
than not, in management's assessment, that the Company's net deferred tax assets will be realized.

Comprehensive Loss

The Company has adopted the accounting treatment prescribed by Financial Accounting Standards Board SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income and loss, and their components, in financial statements. The Company's comprehensive loss consists of net
loss and foreign currency translation adjustment and is presented in the consolidated statements of stockholders' equity. SFAS 130 requires only additional disclosures in the accompanying
consolidated financial statements; it does not affect the Company's financial position or results of operations.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant between the exercise price of the instrument granted and the fair value of the underlying stock.

F-9

---

Net Loss per Share

Basic and diluted net loss per share are the same for all periods presented since the Company was in a loss position in all periods. Potentially dilutive
securities that are not included in the diluted net loss per share calculation because they would be antidilutive are as follows:

Year Ended December 31,2000

1999

1998Stock options and warrants

4,917

3,865

2,134Convertible preferred stock





4,476Total

4,917

3,865

6,610


Segment Information

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did
not affect the Company's results of operations or financial position. The Company operates exclusively in one segment. Substantially all revenues result from the sale of product licenses and related
services.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company performs
periodic credit evaluations of its customers' financial condition and generally does not require collateral.

At
December 31, 2000, two customers represented 15% and 13% of the total accounts receivable balance, including short and long-term portions. At December 31,
1999, two customers represented 13% and 10% of the total accounts receivable balance.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to current year presentation.

2. INVESTMENTS:

The following is a summary of available for sale securities as of December 31:

Available for Sale

2000

1999Amortized Cost:Corporate Notes

$
12,487

$
Commercial Paper


10,439


7,978Federal Government


8,100


9,936Corporate Bonds


8,007


Total

$
39,033

$
17,914Maturity Information:Less than one year

$
38,033

$
17,914One to five years


1,000Total

$
39,033

$
17,914


F-10

---

In
addition, The Company had $364 in a Certificate of Deposit, which was pledged as security and thus, reflected as a long-term investment at December 31, 1999.

3. ACQUISITION OF PORTLAND SOFTWARE, INC.:

The Company was formed in April 1998 to acquire all of the outstanding equity interests of Preview Software and Portland Software. The Company completed
both of these mergers on August 5, 1998. In accordance with Accounting Principles Board Opinion No. 16, the stockholders of Preview Software
were determined to be the controlling stockholders of the Company. Accordingly, the merger with Preview Software was accounted for as a reorganization under common control with the underlying net
assets recorded by the Company at historical cost. The merger with Portland Software was accounted for using the purchase method. Therefore, the accompanying consolidated financial statements reflect
the operations of Preview Software for all periods presented and reflect the operations of Portland Software since August 5, 1998.

The
Company acquired all of the outstanding stock of Portland Software through the issuance of 1,929 shares of its common stock and 838 shares of its Series E Convertible
Preferred Stock, at estimated fair values of $2.00 per common share and $5.00 per preferred share. Option and warrant holders of Portland Software exchanged their rights in common and preferred stock
of Portland Software for similar rights in 998 shares of common stock and 218 shares of Series E preferred stock of the Company. The fair value of these options and warrants was computed using
the Black-Scholes valuation model and was included in the total consideration.

Total
consideration was approximately $9,217 and was allocated as follows:

Acquired technology

$
4,453In-process research and development


2,091Other intangible assets


1,085Patents


484Net tangible assets


1,104Total purchase price

$
9,217


The
acquired technology represented the estimated fair value of Portland Software's principal product, the ZipLock ESD system, which was being sold in the marketplace at the date of
acquisition. The fair value was determined based on management's best estimate of the present value of future cash flows from sales of the ZipLock ESD system. In connection with the merger with
Portland Software, the Company also acquired the ongoing research and development activities of Portland Software resulting in an acquisition related charge of $2,091 for the write off of
in-process research and development costs.

Acquired
technology and other intangible assets acquired are being amortized over two to three years. The summary unaudited pro forma financial information giving effect to the merger
with Portland Software as if it had occurred at the beginning of 1998 was as follows:

Year Ended December 31, 1998Revenues

$
809Net loss


(14,550
)Net loss per share


(5.51
)


The
summary unaudited pro forma information does not purport to be indicative of the results, which would actually have been obtained, had the acquisition occurred at the beginning of
the periods indicated or which may be obtained in the future.

F-11

---

4. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following as of December 31:

2000

1999Computer equipment and software

$
4,185

$
2,282Furniture and fixtures


448


217Leasehold improvements


249


33Communications hardware


380


157Total property and equipment


5,262


2,689Less: Accumulated depreciation


(2,133
)

(1,168
)$
3,129

$
1,521


5. ACCRUED LIABILITIES:

Accrued liabilities consisted of the following as of December 31:

2000

1999Accrued marketing program costs

$
584

$
9Accrued Sony Marketing of Japan termination fee


460


Accrued license acquisition cost


425


Accrued employee compensation


424


280Accrued royalties


402


12Accrued legal fees


358


198Accrued commissions


199


275Other


366


396$
3,218

$
1,170


6. LINE OF CREDIT:

Effective August 4, 2000, Preview obtained a $5,000 line of credit with Silicon Valley Bank, which matures August 4, 2001 and is collateralized
by all assets except cash, highly liquid investments, and intellectual property. Interest on the unpaid balance will accrue at the prime rate, 9.5% percent at December 31, 2000. Preview did not
have any amounts outstanding under the line of credit at December 31, 2000. The line of credit agreement contains financial covenants, including covenants relating to maintenance of minimum
levels of working capital and tangible net worth. Preview was in compliance with these covenants at December 31, 2000.

7. BORROWINGS:

In November 1998, the Company entered into a loan agreement with a bank that provides for borrowings under a three-year term loan. Amounts
borrowed under the term loan bear interest at the bank's prime rate plus 1%. On August 31, 2000, the Company paid off this term loan without penalty.

8. COMMITMENTS AND CONTINGENCIES:

The Company leases its facilities under non-cancelable operating leases, which expire through December 2002. The Company also leases
equipment under non-cancelable capital leases with terms

F-12

---

expiring through the year 2002. Future minimum lease payments relating to these agreements are as follows:

Year Ending December 31,

Capital
Leases

Operating
Leases2001

$
125

$
1,0122002


24


473Total minimum lease payments


149

$
1,485Less: Amounts representing interest


(8
)Present value of minimum lease payments


141Less: Current portion


(117
)Long-term portion

$
24


Rent
expense for the years ended December 31, 2000, 1999 and 1998 was $1,835, $721 and $432, respectively.

9.  STOCKHOLDERS' EQUITY:

Preferred Stock

In July 1999, the Company issued 4,312 shares of Series G Convertible Preferred Stock ("Series G") for net proceeds of $25,847. The
Company also obtained cash proceeds of $1,180 through issuance of various notes payable, which were automatically converted into shares of the Company's Series G. In connection with the
Series G offering, the Company also issued a warrant to purchase 77 shares of Series G.

All
shares of the Company's Series A Convertible Preferred Stock ("Series A"), Series B Convertible Preferred Stock ("Series B"), Series C
Convertible Preferred Stock ("Series C"), Series D Convertible Preferred Stock ("Series D"), Series E Convertible Preferred Stock ("Series E"), Series F
Convertible Preferred Stock ("Series F") and Series G automatically converted into shares of the Company's common stock, on a one for one basis, upon the closing of its underwritten
offering of common stock in December 1999.

Common Stock

In December 1999, the Company issued 3,800 shares of its common stock for net proceeds of $71,243 in its initial public offering. In
January 2000, the Company issued 570 shares of its common stock pursuant to the underwriters' over-allotment option for net proceeds to the Company of $11,118.

As
of December 31, 2000 and 1999 the Company had reserved shares of its common stock for future issuance as follows:

December 31,2000

1999Exercise of outstanding common stock warrants

305

482Exercise of stock options

4,999

4,545Employee stock purchase plan

672

500Total shares reserved

5,976

5,527


F-13

---

Warrants Outstanding

As of December 31, 2000, the following warrants were outstanding and fully vested:

Underlying Security

Number of
Shares

Exercise
Price
Per Share

Expiration
DateCommon Stock

5

$
3.20

September 2002Common Stock

168


12.88

August 2004Common Stock

132


9.00

December 2003305


No
warrants were issued during 2000. Warrants covering a total of 33 shares of the Company's common stock were exercised during 2000 at a weighted average exercise price per share of
$12.88. Warrants covering a total of 279 shares of the Company's common stock were exercised during 1999 at a weighted average exercise price per share of $7.29. No warrants were exercised during
1998.

In
October 1999, the Company entered into an agreement with Virgin Holdings, Inc. (an affiliate of EMI Recorded Music), in which Virgin Holdings selected the Company to
be EMI Recorded Music's preferred, recommended technology provider for the digital distribution of music and agreed to recommend the Company's solution to EMI Recorded Music's worldwide distributors
and retailers. The
Company issued a warrant to purchase 265 shares of its common stock to Virgin Holdings at an exercise price per share of $9.00. Upon signing of the agreement, 99 shares were exercisable and the
remaining 166 shares are exercisable upon achievement of certain milestones. The Company recorded a non-cash charge of $546 to stock based compensation in the fourth quarter of 1999 for
the fair value, as determined by the Black-Scholes valuation model, of warrant shares that vested during that quarter. An additional $1,364 was charged during 2000 as 33 shares vested. The final 133
shares did not vest as scheduled in 2000, as pre-determined performance criteria were not met, and thus these warrants were cancelled.

Stock Option Plans

The Company has a 1998 Stock Option Plan ("98 Plan") and three terminated stock option plans. Pursuant to the terms of the 98 Plan, on January 1, 2000
the total number of shares of the Company's common stock authorized for issuance thereunder were increased by 486 shares to a total of 3,336 shares. As of December 31, 2000, the Company had
reserved an aggregate of 3,174 shares of common stock for issuance under the 98 Plan and terminated stock option plans combined. At December 31, 2000, there were no shares available for future
grant under the 98 Plan.

The
98 Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the 98 Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options ("ISO's") may be granted only to employees of the Company and nonqualified stock options ("NSO's") may be granted to employees of the Company and to
consultants. Options granted are generally exercisable over a period not exceeding ten years from the date of grant, vest ratably over four years and have an exercise price equal to the fair market
value on the date of grant.

The
terms of the 98 Plan provide for an automatic annual increase to the total authorized shares on the first day of each of the Company's fiscal years beginning in 2000 and ending in
2008 equal to the lesser of (i) 800 shares, (ii) 3% of the Company's outstanding common stock on the last day of the immediately preceding fiscal year, or (iii) such lesser number
of shares as the Board of Directors determines.

F-14

---

In August 1999, the Board of Directors approved the 1999 Directors Stock Option Plan ("1999 Directors Plan") and reserved 300 shares of common stock for issuance thereunder.
Pursuant to the terms of the 1999 Directors Plan, on January 1, 2000 the number of shares of the Company's common stock authorized for issuance thereunder were increased by 150 shares to a
total of 450 shares. As of December 31, 2000 the Company had 350 shares available for grant and 450 shares of common stock
reserved for issuance under the 1999 Directors Plan. The 1999 Directors Plan is subject to an automatic annual increase to the number of shares authorized for issuance on the first day of each of the
Company's fiscal years over the 10-year term of the plan, equal to the lesser of (i) 150 shares, (ii) 1% of the Company's outstanding common stock on the last day of the
preceding fiscal year, or (iii) a lesser number of shares as determined by the Board of Directors.

In
October 1999, the Board of Directors approved the 1999 Executive Stock Option Plan ("1999 Executive Plan"), and authorized 863 shares of common stock for issuance
thereunder. The terms of the 1999 Executive Plan options are similar to the terms of the options issuable under the 98 Plan, except that only officers are eligible to participate in the 1999 Executive
Plan and the 1999 Executive Plan does not provide for automatic annual increases in the number of shares authorized. As of December 31, 2000, the Company had 38 shares available for grant and
863 shares of common stock reserved for issuance under the 1999 Executive Plan.

The
Company also has options outstanding outside of the plans discussed above. A summary of all stock option activity is as follows:

Shares
Available
for Grant

Shares
Subject to
Options

Weighted
Average
Exercise
Price
Per ShareBalances, December 31, 1997

94

468

$
0.50Additional shares reserved

2,785




Options granted

(701
)
701


1.67Options assumed in Portland Software acquisition

(826
)
826


1.72Options cancelled

156

(164
)

1.20Options exercised



(118
)

0.61Balances, December 31, 1998

1,508

1,713


1.48Additional shares reserved

2,713




Terminated plans

(880
)



Options granted

(2,245
)
2,245


9.70Options cancelled

66

(195
)

2.75Options exercised



(380
)

1.26Balances, December 31, 1999

1,162

3,383


6.90Additional shares reserved

801




Options granted

(2,295
)
2,295


12.56Options cancelled

719

(773
)

10.43Options exercised



(293
)

1.95Balances, December 31, 2000

387

4,612

$
9.44


Subsequent
to December 31, 1998, options that are cancelled that were granted under a now terminated plan are not added back to the shares available for grant.

F-15

---

As of December 31, 2000, stock options outstanding, including options granted outside of the stock option plans, were as follows:

Options Outstanding

Options ExercisableRange of
Exercise
Prices

Number
Outstanding
at 12/31/00

Weighted
Average
Remaining
Contractual
Life (years)

Weighted
Average
Exercise
Price

Number of
Shares
Exercisable
at 12/31/00

Weighted
Average
Exercise
Price$
0.00-0.04

47

7.6

$
0.01

47

$
0.010.10

65

9.3


0.10

20


0.100.50

96

6.2


0.50

70


0.501.00-2.00

657

7.2


1.94

469


1.933.03-4.38

493

9.9


3.51




6.50-9.00

1,999

8.7


8.51

525


8.1510.00-12.56

562

9.4


12.44

92


12.1617.06-21.00

440

9.1


18.22

79


21.0031.50-46.88

249

9.3


32.98




61.00

4

9.0


61.00

1


61.00$
0.00-61.00

4,612

8.7

$
9.44

1,303

$
6.19


At
December 31, 1999 and 1998, 707 and 536 options, respectively, were exercisable at weighted average exercise prices of $3.74 per share and $1.26 per share, respectively.

Employee Stock Purchase Plan

In August 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan ("1999 ESPP"), and reserved 500 shares of common stock for
issuance thereunder. The 1999 ESPP is intended to qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. Eligible employees are
entitled to contribute up to 20% percent of their base pay
for the purchase of stock. The purchase price for shares purchased under the 1999 ESPP is 85 percent of the fair market value on the first day of each offering period or on the purchase date,
whichever is lower. Pursuant to the terms of the 1999 ESPP, on January 1, 2000 the number of shares of the Company's common stock authorized for issuance thereunder were increased by 324 shares
to a total of 824 shares. A total of 152 shares of the Company's common stock were issued under the 1999 ESPP during 2000, and 672 remained available for issuance at December 31, 2000. There
were no shares issued in 1999.

The
shares authorized for issuance under the 1999 ESPP are subject to an automatic annual increase on the first day of each of the Company's fiscal years over the 10-year
term of the plan, equal to the lesser of (i) 400 shares, (ii) 2% of the Company's outstanding common stock on the last day of the immediately preceding fiscal year, or (iii) such
lesser number of shares as the Board of Directors determines.

Statement of Financial Accounting Standards No. 123

In October 1995, the Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation,"
which establishes a fair value-based method of accounting for stock-based compensation plans and requires additional disclosures for those companies who elect not to adopt the new method of
accounting. The Company has adopted SFAS 123, and in accordance with the provisions of SFAS 123, the Company has elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option plans.

F-16

---

Had compensation cost for the Company's stock option plans been determined consistent with SFAS 123, the Company's net loss would have been adjusted to the following pro forma
amounts:

Year Ended December 31,2000

1999

1998Net loss:As reported

$
(24,502
)
$
(17,054
)
$
(11,276
)Pro forma


(30,120
)

(18,341
)

(11,360
)Net loss per share:As reported

$
(1.44
)
$
(4.65
)
$
(7.55
)Pro forma


(1.77
)

(5.00
)

(7.60
)


Because
the Black-Scholes option valuation model requires the input of subjective assumptions, the resulting pro forma compensation cost may not be representative of that to be
expected in future periods.

In
accordance with SFAS 123, the Company has recorded compensation using the Black-Scholes option pricing model for options issued to non-employees. Compensation
expense related to these options was $1,118, $252 and $7 for 2000, 1999 and 1998, respectively. The weighted average per share fair value of options granted during 2000, 1999 and 1998 was $9.78, $2.84
and $0.42, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The minimum value method, which excludes volatility
factors, was used in 1999 for grants prior to the Company's initial public offering and in 1998 as the Company was privately held.

The
following assumptions were used:

Year ended December 31,2000

1999

1998Risk-free interest rate

5.9
%
5.5
%
5.5
%Expected dividend yield

0
%
0
%
0
%Expected lives (years)

4

4-5

5Volatility

97.0
%
91.7
%



In
connection with the issuance of stock options, the Company recorded deferred compensation of $2,825, $221 and $50 for the years ended December 31, 2000, 1999 and 1998,
respectively, representing the difference between the fair value of the Company's common stock and the exercise price of stock options at the date of grant. The Company amortizes the deferred
compensation over the applicable vesting period, typically four years and had deferred compensation of $1,449 and $101 at December 31, 2000 and 1999, respectively.

10. INCOME TAXES:

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires recognition of
deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income tax
assets and liabilities are determined using the

F-17

---

current applicable enacted tax rates and provisions of the enacted tax law. The Company had net deferred tax assets and liabilities as follows:

December 31,2000

1999Net operating loss carryforwards

$
22,035

$
12,027Accruals and reserves


499


158Research and development costs capitalized for income tax purposes


381


651Depreciation and amortization


91


Deferred revenue





995R&D credit


853


330Stock based compensation expense


314


313Basis difference in acquired net assets of Portland Software


(1,900
)

(1,900
)22,273


12,574Valuation allowance


(22,273
)

(12,574
)Net deferred income taxes

$


$



At
December 31, 2000, the Company had net operating loss carryforwards of approximately $53,000 for both federal and state tax purposes. The federal net operating loss
carryforwards expire on various dates through 2020, while the state net operating loss carryforwards expire on various dates through 2015. The Company believes that, based on a number of factors,
there is sufficient uncertainty regarding the realizability of net deferred tax assets such that a full valuation allowance should be recorded. These factors include a history of operating losses, the
competitive nature of the Company's
market and the lack of predictability of revenue. Management will continue to assess the realizability of the tax benefits available to the Company based on actual and forecasted operating results.
Changes in ownership resulting from the merger described in Note 3 and other ownership changes may significantly limit the utilization of net operating loss carryforwards in the future.

11. SEGMENT INFORMATION:

The Company operates in one industry segment: the design, development and marketing of technology that enables the distribution and licensing of digital goods
over the Internet and via other digital media. All long-lived assets are located in the United States. The Company's geographic revenue information is summarized as follows:

Year Ended December 31,2000

1999

1998Sales to unaffiliated customers:United States

$
4,720

$
2,053

$
266Europe


917


292


24Asia


1,576


1,015


274Other


555


123


46$
7,768

$
3,483

$
610


One
customer accounted for 15% of total revenues in 2000. Two customers accounted for 26% and 12%, respectively, of total revenues in 1999. Two customers accounted for 45% and 13%
respectively, of total revenues in 1998.

F-18

---

12. RELATED PARTY TRANSACTIONS:

In conjunction with the exercise of stock options for the issuance of 250 shares of common stock to the Chief Executive Officer, the Company issued three notes
aggregating $125. The notes are full recourse, secured by shares of the Company's common stock and bear interest at 6% per annum. The principal and unpaid interest are due in full on May 27,
2001 for $25 of the notes and June 6, 2001 for the remaining $100 of notes. The shares issued are subject to repurchase by the Company until the notes are paid.

In
July 1999, the Company sold 125 and 150 shares of common stock at a price of $6.50 to the President and Chief Executive Officer and Chief Operating Officer / Chief Financial
Officer, respectively. Under the terms of these sales, the Company can repurchase a certain number of their shares of stock if they quit or are terminated, subject to a monthly vesting schedule. In
addition, the Company has a right of first refusal to purchase any or all of their shares if they decide to sell or transfer their shares. In connection with these sales, the officers executed
full-recourse promissory notes in the respective amounts of $812 and $975 in favor of the Company with annual interest rates of 5.32%. These notes become due and payable upon the earlier
of July 2002 or termination of their employment with the Company. The officers have also entered into pledge and security agreements granting the Company a security interest in these shares.

On
October 11, 2000, the Company entered into an agreement to lend $175 to the Chief Executive Officer. The note receivable is full recourse, unsecured and bears interest at
11% per annum. The principal and unpaid interest are due in full on October 11, 2001, however, the note may be prepaid at any time without penalty.

13. EMPLOYEE SAVINGS PLAN:

The Company has a profit sharing plan and trust that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code
("401(k) Plan"). Under the terms of the 401(k) Plan, employees of the Company may make voluntary contributions to the 401(k) Plan as a percentage of compensation, but not in excess of the maximum
allowed under the Internal Revenue Code. Employees become eligible to participate in the 401(k) Plan on the first day of the month following date of hire. The Company currently does not match employee
contributions.

14. QUARTERLY FINANCIAL INFORMATION:

A summary of unaudited quarterly financial information follows:

Quarter EndedMarch 31

June 30

Sept. 30

Dec. 312000Total revenues

$
1,669

$
2,405

$
1,842

$
1,852Loss from operations


(8,471
)

(6,870
)

(6,789
)

(8,122
)Net loss


(7,047
)

(5,267
)

(5,390
)

(6,798
)Net loss per share, basic and diluted

$
(0.42
)
$
(0.31
)
$
(0.31
)
$
(0.40
)1999Total revenues

$
463

$
758

$
1,043

$
1,219Loss from operations


(3,606
)

(3,833
)

(4,330
)

(5,968
)Net loss


(3,578
)

(3,858
)

(4,084
)

(5,534
)Net loss per share, basic and diluted

$
(1.33
)
$
(1.42
)
$
(1.32
)
$
(0.94
)


F-19

---

15. SUBSEQUENT EVENTS:

Litigation

In October 2000, Network Commerce, Inc. filed a civil action against us in the Federal District Court for the Western District of Washington in
Seattle, case number C00-1790L. The complaint alleges that we infringed U.S. Patent No. 6,073,124. Service was accomplished on February 28, 2001. On March 23, 2001,
the Company and Network Commerce, Inc. signed a settlement agreement, mutual release and covenant not to sue. As a result, the Company obtained a perpetual license to use the technology. The
cost of the license was not material to the Company's financial position and is recorded as an intangible asset to be amortized over five years.

Office Notes Receivable

On March 13, 2001, the Company entered into an agreement to lend $225 to the Chief Executive Officer. The note receivable is full recourse, unsecured and bears
interest at 6.25% per annum. The principal and unpaid interest are due in full on August 15, 2002, however, the note may be prepaid at any time without penalty.

In
addition, on March 13, 2001, the Company modified the terms of several notes with the Chief Executive Officer. Specifically, the maturity date on four notes aggregating $937
was extended from maturity dates ranging between May 2001 and July 2002 to December 15, 2002. In addition, a separate note for $175 was modified to reflect a new interest rate of
6.25% per annum from March 13, 2001 through the new maturity date of August 15, 2002, rather than 11% per annum through the original maturity date of October 11, 2001.

Current Events

The
market for distribution of digital content is developing more slowly than we originally anticipated. Consequently, our revenue growth has not met internal projections. As a
result, we have taken a variety of actions.

In
February 2001, we announced a reduction in our headcount of approximately 25%, eliminating 37 positions. We also introduced other expense control measures primarily in the
area of marketing programs and we reduced our reliance on outside contractors.

In
addition, we announced that we are currently exploring various strategic alternatives and are currently in negotiations to sell all or parts of our business. We believe that such a
sale could enhance both stockholder value as well as increase the benefits to our customers.

No
assurance can be given that we will be successful in completing any possible alternatives currently being explored. In addition, it is difficult to predict the impact of these
announcements on our ability to close sales contracts with new customers, our ability to renew contracts with existing customers, or our ability to retain key employees.

F-20

---

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