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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                         to                     

Commission File No. 000-20364

ePresence, Inc.

(Exact Name of Registrant as Specified in Its Charter)

120 Flanders Road, Westboro, Massachusetts 01581

(Address and Zip Code of Principal Executive Offices)

508-898-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(Title of Class)

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.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes ¨    No x

The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the last sale price on the NASDAQ National Market on June 28, 2002 was $71,879,201. For this purpose, any officer, director or known 10% stockholder of the Company is deemed to be an affiliate. The Registrant has no shares of non-voting Common Stock authorized or outstanding.

On March 27, 2003, there were 22,654,227 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specifically identified portions of the Registrant’s Definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2002 in connection with the Company’s 2003 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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ePresence, Inc.

Index to Annual Report on

Form 10-K filed with the

Securities and Exchange Commission

Year Ended December 31, 2002

Items in Form 10-K

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that are subject to a number of risks and uncertainties, including, without limitation, information with respect to our plans and strategy for our business, statements relating to the sufficiency of cash and cash equivalent balances, anticipated expenditures, the anticipated effects of our cost reduction measures including the discontinuation of our operations in Europe and Australia, and our sales and marketing and product development efforts. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undo reliance on our forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “will”, “believe”, “anticipate”, “plan”, “expect” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, the factors set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Operating Results” which is in Part II of this Annual Report on Form 10-K. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. We do not assume any obligation to update any of the forward-looking statements we make.

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PART I

ITEM 1.     BUSINESS

General

ePresence, Inc., (“ePresence,” the “Company” or the “Registrant”), has two reportable segments: services and Switchboard. The Company’s reportable segments are managed separately as they are separately traded public companies, and market and distribute distinct products and services. See Note 23, Segment Information, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002 which is incorporated from Item 8 herein.

On March 2, 2000, Switchboard Incorporated (“Switchboard”) consummated an initial public offering. Prior to the offering we owned approximately 54% of Switchboard’s outstanding common stock. Subsequent to the IPO and through December 31, 2000 we continued to consolidate Switchboard’s results as part of our financial results as, notwithstanding our 38% ownership of Switchboard’s outstanding common stock during this period, the Company maintained control over Switchboard’s board of directors under a Voting Rights Agreement by and among the Company, Switchboard and Viacom Inc. (“Viacom”). However, in January 2001, as a result of the termination of this Voting Rights Agreement and our ownership then being 38%, we ceased to consolidate Switchboard’s results with our financial results, for the first three quarters of 2001. In connection with the Viacom transaction discussed in Note 25 in Company’s Notes to Consolidated Financial Statements, we became owner of approximately 54% of Switchboard’s outstanding stock in October 2001. This change in ownership percentage resulted in us retroactively consolidating Switchboard’s revenues, expenses and other income and expense in our consolidated statement of operations, while the minority interest in Switchboard was eliminated through consolidated other income and expense, as of January 1, 2001. Accordingly, the results of operations for 2002, 2001 and 2000, respectively, are presented consistently herein on a consolidated basis. In addition, Switchboard’s assets and liabilities are consolidated in our Consolidated Balance Sheet as of December 31, 2002 and December 31, 2001. At December 31, 2002, we owned 9,802,421 shares or an approximate 52% equity interest of Switchboard’s outstanding common stock.

The Company’s Internet website address is www.epresence.com. The Company makes available free of charge on its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

“ePresence” is a servicemark of the Company. Other trademarks, tradenames and servicemarks used in this Annual Report on Form 10-K are the property of their respective companies or organizations.

Services

ePresence is a leading consulting and systems integration company delivering Security and Identity Management (“SIM”) solutions that help companies reduce cost, enhance security, improve service and increase revenues. Identity management promotes effective management of users and access to the right information across IT environments, creating context and common infrastructure across distributed constituencies, business processes and applications. Our primary service offerings blend the elements of security and identity management, which include enterprise directory and security services, meta-directory services, access and password management services, single sign-on services, electronic provisioning services, information technology platform services, and managed operational services.

Enterprise directory and security services and meta-directory services consist of directory and security solutions that allow customers to manage and protect user identity, access, and security information across an

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enterprise. ePresence provides a business-focused, collaborative approach to the planning, design, deployment and management of these services including:

Access and password management services and single sign-on services help organizations protect information assets, enforce security policies, boost IT management efficiency and accelerate application development cycles. Rather than developing and managing access services and processes for each system and application, organizations utilize our services to unify the authentication and authorization services across the enterprise, eliminating user frustration from the need to separately log in to each system and application, and avoiding the costs of supporting multiple passwords and repetitive application development. These services include:

Electronic provisioning services allow customers to empower their employees, partners and customers with fast, convenient electronic access to appropriate company resources and applications. It is difficult for businesses today to manage the provisioning process because of the growing variety of systems within an organization and the high cost of managing user identities and permissions across organizations. Electronic provisioning streamlines the provisioning process while making it more secure, and it also facilitates de-provisioning (the rapid removal of access rights when a user leaves a company) which is especially critical to managing enterprise security and identity risks. ePresence provides a full range of services around the strategy, planning, design, deployment and management of an electronic provisioning solution including:

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Information technology platform services involve migration to and deployment of the latest operating system or infrastructure platform to allow customers to form a solid base for integrating identity platforms and high-value business applications. ePresence consultants provide platform-specific expertise and project management support to help organizations move to next generation platforms, while providing a wide range of services and capabilities designed to help organizations maximize new platform benefits. These include packaged services such as structured strategy workshops that use interactive, client-focused sessions to explore the specific values, impacts and business and technical considerations for deploying a new platform. ePresence also provides custom platform services ranging from planning and design to migration and deployment to operations and optimization.

Managed operational services allow customers to operate and optimize enterprise solutions on an outsourced, managed or transitional basis. Our services include a managed service offering for enterprise-level Broadband Virtual Private Network (“bVPN”) services, permitting organizations with remote workforces to leverage high-speed broadband connectivity to improve user productivity and control costs. Our one-stop solution combines equipment and broadband services while delivering specialized end user support in the context of the user’s application environment. Other managed operational services consist of systems operations management, where we work with our customers to identify the infrastructure components that need managed support and create a support solution; operations transition management, which takes an organization through a seamless transition from one environment to another; and optimization services to tune existing environments. ePresence also provides custom operations management services to satisfy a variety of needs that a large IT organization might face.

Throughout 2002, with respect to services, we focused our efforts on positioning our Security and Identity Management services within the market, developing new offerings, improving our operational efficiency, engaging new partners and enhancing existing alliances, and bolstering our skills to complement our extensive directory and infrastructure knowledge.

Switchboard

Switchboard, our majority-owned subsidiary (NASDAQ: SWBD), is a leading provider of Web hosted directory technologies and customized yellow pages platforms to yellow pages publishers, newspaper publishers and Internet portals that offer online local directory advertising solutions to national retailers and “brick and mortar” merchants across a full range of Internet and wireless platforms. Switchboard offers a broad range of functions, content and services including yellow and white pages, location based searching and interactive maps and driving directions. Switchboard has developed sophisticated technologies that enable rapid dissemination of information requested by consumers using its web site. Switchboard also has particular strengths in the areas of database technologies, advertising management, and content customization.

Switchboard’s flagship web site, Switchboard.com, provides a free alternative to costly directory assistance charges, over 100 million page views are generated on the site by more than 5 million consumers each month

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(according to Nielsen NetRatings—December 2002) performing business, people and product lookups both at home and in the workplace. Usage on Switchboard.com grew by more than 50% from January 2002 to December 2002. Yellow pages and general site advertising on the Switchboard.com web site can be purchased through its direct sales force as well as through its merchant network alliance partners who sell to their local merchant customers the additional distribution of their advertisement within the Switchboard.com web site “Switchboard Distribution” in conjunction with their own online yellow pages products.

Switchboard’s MapsOnUs technology integrates maps and driving directions into many areas of its directory platform, and is also available through Switchboard’s MapsOnUs.com web site. Utilizing its MapsOnUs capabilities, Switchboard is able to provide businesses with dealer locators that can be easily integrated into their Web sites to help visitors locate the closest outlet, dealer or franchisee. Switchboard also customizes the MapsOnUs maps and driving directions content for licensing to a number of online destinations.

Switchboard’s principal sources of revenue are merchant network revenue and banner and site sponsorship advertising revenue. In 2002, 2001 and 2000 merchant network revenue was 87.9%, 66.9% and 41.6%, respectively, of Switchboard’s total net revenues. Switchboard merchant network revenue is comprised of the following:

As of December 31, 2002 Switchboard employed 68 full-time employees. None of Switchboard’s employees are represented by a labor union and Switchboard believes its relations with its employees are good. All of Switchboard’s employees have executed confidentiality and assignment of invention agreements.

Switchboard’s competition consists of Internet-based yellow and white pages directories that do not utilize Switchboard’s directory platform, such as Yahoo! Yellow Pages and Verizon SuperPages, print yellow and white pages directories that compete with online offerings for advertiser dollars, and Internet-based pay-for-placement search engines and services, such as Google and Overture, as they begin to expand their offerings to local markets. These markets are highly competitive, and Switchboard expects competition to increase in the future with the entrance of new competitors. Switchboard competes with these organizations primarily on the basis of directory technology and the price and distribution of directory advertisements. Switchboard believes the online local advertising market is rapidly developing.

For the year ended December 31, 2002, AOL accounted for 41.8% of Switchboard’s net revenue. For a further discussion of Switchboard’s relationship with AOL, see Note 26, AOL Alliance, in the Company’s Notes

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to Consolidated Financial Statements for the year ended December 31, 2002, which are incorporated from Item 8 herein.

For a further discussion of our relationship with Switchboard, see Note 27, Related Parties, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002, which are incorporated from Item 8 herein.

Customers

Our services customers, which include many Fortune 1000 companies, typically are medium to large-size businesses, financial institutions, manufacturers, professional organizations and government entities, each with multiple sites dispersed over wide geographic areas. In 2002 we initiated a number of new consulting engagements with leading organizations such as Covance, Johnson Controls, the Securities Industry Automation Corporation (SIAC), Pearson Technology Group and Weightwatchers.com. In addition, we won additional business from many of our existing customers including the Turner Corporation, the Commonwealth of Massachusetts, Automatic Data Processing (ADP), Stop & Shop Supermarket Company and the State of Michigan.

For the year ended December 31, 2002 ChevronTexaco and AOL, through its alliance with Switchboard, accounted for 17% and 11% of consolidated revenues, respectively. For the year ended December 31, 2001 ChevronTexaco and Turner Corporation accounted for 12% and 10% of consolidated revenues, respectively. No one customer accounted for more than 10% of consolidated revenues for the year ended December 31, 2000.

Sales and Marketing

We market our services primarily through sales professionals located in the United States. Our principal U.S. locations are based in or near Boston, Dallas, Detroit, Los Angeles, New York, San Francisco and Washington, D.C. This regional focus, combined with our local service approach, is designed to help us to develop strong market presence and recognition in each of our local markets. Our sales professionals operate through a coordinated process to evaluate prospective customers and secure new engagements.

The sales efforts of our services business are supplemented by marketing and communications activities that are pursued to generate leads and build brand recognition in the marketplace. These activities include focused regional customer facing activities, attendance at industry conferences and business events, development of sales and marketing materials, general branding activities and public relations initiatives.

We have established alliances with the following companies to support our solutions selling model: Business Layers, IBM, M-Tech, Microsoft, Netegrity, OpenNetwork and Sun. We continue to seek to grow our services business partnerships and alliances with leading product and technology vendors, as well as with other systems integrators and consultants. Our partners directly complement our security and identity management solutions and help us bring our depth and expertise to market and deliver client-driven solutions in the marketplace.

Competition

The consulting and systems integration services business is highly fragmented and competitive with no dominant set of consulting or systems integration companies that we directly compete against. We believe that our services business currently competes principally with consulting and systems integration firms, systems and application vendors and internal information systems groups. Competitive conditions and cautious buying

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patterns are forcing industry consolidation within the vendor, systems integration and consulting groups. Many of these companies have greater financial, technical and marketing resources than we have, generate greater revenues and have greater name recognition than us. We will continue to face competition as a result of consolidations in the market. We believe the primary factors upon which competition in our industry are based are contribution to business performance and delivery capability, including technical and business knowledge, strong project methodology, partnerships and successful cost-effective client implementations.

Employees

At December 31, 2002, we employed 161 persons, including 124 in sales, marketing, professional services delivery and related activities, and 37 in finance, legal, administration and human resources. We have no collective bargaining agreement with respect to our employees. We believe that relations with our employees are good.

International Operations

As a part of our plan to improve results, we announced the closure of our remaining European operations in the United Kingdom and Germany in the first quarter of 2002. As a result of this action, we recorded charges totaling approximately $2,000,000 in the first quarter of 2002 related to the closure of these operations. We no longer have any operations outside of the United States, except in Canada.

ITEM 2.     PROPERTIES

Our principal administrative and sales and marketing facilities are located in Westboro, Massachusetts and consist of approximately 79,203 square feet under a lease that expires on July 31, 2005, with an aggregate annual base rent of approximately $424,000. We sublease approximately 27,200 square feet of this space to Switchboard and Array Incorporated combined. Under the Switchboard sublease that expires on December 31, 2003, the aggregate annual base rental income is approximately $227,000. Under the Array Incorporated sublease that expires on September 30, 2005, the aggregate annual base rental income is approximately $123,000. We lease and occupy sales offices in five additional locations throughout the United States.

ITEM 3.     LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject.

On May 31, 2002 Switchboard was sued in the Superior Court of Suffolk County, Massachusetts by the former stockholders of Envenue, Inc., from whom Switchboard purchased all of the stock of Envenue in November 2000. The suit, styled Douglass J. Wilson et al v. Switchboard Incorporated et al, Civil Action No. 02-2370 BLS, alleges that Switchboard breached its agreement with the plaintiffs by failing to pay the purchase price of the Envenue stock when it became due on May 24, 2002. Switchboard paid $400,000, plus interest of $10,060, representing a portion of the purchase price, to the plaintiffs. The suit seeks payment of $1,600,000, representing the balance of the purchase price, plus additional unquantified damages including treble damages under Mass. Gen. Laws c. 93A. The court heard oral argument on Switchboard’s motion to dismiss the complaint in November 2002, and subsequently granted that motion in part. The plaintiffs subsequently amended their complaint. Switchboard has moved to dismiss the amended complaint and is awaiting the court’s ruling on that motion.

On November 21, 2001, a class action lawsuit was filed in the United States District Court for the Southern District of New York naming as defendants Switchboard, the managing underwriters of Switchboard’s initial public offering, Douglas J. Greenlaw, Dean Polnerow, and John P. Jewett. Mr. Greenlaw and Mr. Polnerow are

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officers of Switchboard, and Mr. Jewett is a former officer of Switchboard. The complaint is captioned Kristina Ly v. Switchboard Incorporated, et al., 01-CV-10595. In July 2002, Switchboard, Douglas J. Greenlaw, Dean Polnerow and John P. Jewett joined in an omnibus motion to dismiss which challenges the legal sufficiency of plaintiffs’ claims. The motion was filed on behalf of hundreds of issuers and individual defendants named in similar lawsuits. The plaintiffs opposed the motion. On September 30, 2002, the lawsuit against Messrs. Greenlaw, Polnerow and Jewett was dismissed without prejudice. The Court heard oral argument on the motion in November 2002. On February 19, 2003, the court issued its decision on the defendants’ motion to dismiss, denying it in large part, but granting portions of it. In doing so, the court dismissed the plaintiffs’ claims under Section 10b-5 of the Securities Act of 1933 against certain defendants, including Switchboard.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

EXECUTIVE OFFICERS OF THE REGISTRANT

The Company’s executive officers as of March 27, 2003 were as follows:

Mr. Ferry, Chairman of the Board, President and Chief Executive Officer, joined the Company in February 1997. Mr. Ferry has been Chairman of the Board since October 1997 and has been a director of the Company and served as President and Chief Executive Officer since joining the Company. Mr. Ferry has served as a Director of Switchboard since March 1997 and has been Switchboard’s Chairman of the Board since February 1998. From August 1990 to February 1997, he served in various management capacities at Wang Laboratories, Inc., a global network and desktop integrating and services company, including President, Services Division from July 1994 to February 1997 and Senior Vice President and General Manager, North American Operations from January 1993 to July 1994.

Mr. Bellantuoni, Senior Vice President of Human Resources, joined the Company in July 1997. Prior to joining the Company, Mr. Bellantuoni was Vice President of Human Resources at Wang Laboratories, Inc., a global network and desktop integrating and services company, from 1993 to 1997. Mr. Bellantuoni also held various senior management positions at Wang Laboratories, Inc. from 1979 to his appointment as Vice President in 1993.

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Mr. Kitlinski, Vice President and Chief Information Officer, joined the Company in September 1999. Prior to joining the Company, Mr. Kitlinski was a GartnerGroup analyst from September 1998 to September 1999. Mr. Kitlinski served as vice president and chief information officer for Bronner Slosberg Humphrey from June 1995 to September 1998. Prior to joining Bronner Slosberg Humphrey, Mr. Kitlinski served as group manager of consulting services and strategic support services for Stream International.

Mr. Newman, Vice President and General Counsel, joined the Company in April 2000. Prior to joining the Company, Mr. Newman served as Assistant General Counsel for Wang Global Corporation, an information technology network services company, from February 1996 to April 2000. Prior to joining Wang, Mr. Newman was an associate at the law firm of Choate, Hall & Stewart in Boston, Massachusetts.

Mr. Silk, Senior Vice President and General Manager, Services, joined the Company in January 1999. Prior to joining the Company, Mr. Silk was President of North American Operations and Vice President of Worldwide Marketing at Gentia Software, a software company specializing in data warehousing and analytical applications, from January 1997 to January 1999. In 1996, Mr. Silk was Vice President of Sales and Marketing at Actium Corporation, a systems integration firm. From 1980 to 1995, he held a variety of senior level sales, marketing and general management positions at Unisys Corporation.

Mr. Spaulding, Senior Vice President and Chief Financial Officer, Treasurer and Clerk, joined the Company in September 1990. Mr. Spaulding has served as a Director of Switchboard since April, 1996. Prior to joining the Company, he served in a number of senior financial management positions with C. R. Bard, Inc., a medical products provider, from June 1985 to September 1990. From June 1983 to June 1985, Mr. Spaulding was a Certified Public Accountant with Arthur Andersen & Company.

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PART II

Information with respect to this item may be found under Item 6, “Selected Financial Data” of this Annual Report on Form 10-K.

ITEM 6.     SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read together with our audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results of operations to be expected in the future.

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QUARTERLY FINANCIAL INFORMATION

1. Switchboard revenue includes, as an offset to revenue, amortization of consideration given to a customer of $2.0 million, $4.0 million and $0.4 million for the years ended December 31, 2002, 2001 and 2000, respectively, in accordance with Emerging Issues Task Force Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”, which became effective for fiscal years beginning after December 15, 2001.

2. Includes approximately $9,680 and $11,824 in non-cash CBS advertising expense in 2001 and 2000 respectively. Includes a $22,203 non-cash loss on Switchboard’s exchange of remaining advertising credits with Viacom for Switchboard stock for 2001.

3. Includes an impairment of goodwill of approximately $14,779 and $12,364 for our services segment for 2002 and 2001, respectively. Includes special charges of $17,300 for Switchboard related to the impairment of the AOL Directory Agreement and other charges for 2001.

4. Includes a net realized gain of approximately $33,378, $44,556 and $16,586 in 2001, 2000 and 1999, respectively, for the sale of shares in Openwave.

5. In 1999, we announced a decision to exit our software business and began to account for the software business as discontinued operations. Included in the 1999 results of operations is an estimated loss from disposal of discontinued operations of $3.0 million, net of tax.

The Company’s common stock trades on the NASDAQ National Market under the symbol “EPRE.” The Company has not paid cash dividends on its common stock and has historically retained earnings for use in its business. The Company has no present intention to pay dividends.

On March 27, 2003, the Company had 6,384 shareholders of record.

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OVERVIEW

ePresence has two reportable segments: services and Switchboard. Our reportable segments are managed separately as they are separately traded public companies, and market and distribute distinct products and services. See Note 23 Segment Information in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002 which is incorporated from Item 8 herein.

ePresence is a leading consulting and systems integration company delivering Security and Identity Management (“SIM”) solutions that help companies reduce cost, enhance security, improve service and increase revenues. Identity management promotes effective management of users and access to the right information across IT environments, creating context and common infrastructure across distributed constituencies, business processes and applications. Our primary service offerings blend the elements of security and identity management, which include enterprise directory and security services, meta-directory services, access and password management services, single sign-on services, electronic provisioning services, information technology platform services, and managed operational services.

As of December 31, 2002, we owned approximately 52% of Switchboard’s outstanding common stock and, therefore, consolidate Switchboard’s results with our financial results. Switchboard is a leading provider of web hosted directory technologies and customized yellow pages platforms to yellow pages publishers, newspaper publishers and Internet portals that offer online local directory advertising solutions to national retailers and “brick and mortar” merchants across a full range of Internet and wireless platforms.

In 2002, as a result of unfavorable economic conditions and to offset declines in revenue, we took a number of actions to mitigate the negative effects of these conditions while enhancing our competitive capabilities. Cost reduction initiatives included the reductions in staff and the closing of our operations in Germany and the United Kingdom during the first quarter of 2002. These actions were intended to allow us to better align our resources with revised revenue expectations and fully focus on the domestic market.

Adoption of EITF 01-9

Effective January 2002, Switchboard adopted Emerging Issues Task Force Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (“EITF 01-9”), which became effective for fiscal years beginning after December 15, 2001. Switchboard has concluded that EITF 01-9 is applicable to the accounting for its directory and local advertising platform services agreement with AOL (“Directory Agreement”), as the benefits received from consideration given to AOL are not sufficiently separable from the revenue derived from AOL. Switchboard’s 2000 and 2001 results have been adjusted to conform to the presentation required by EITF 01-9. Accordingly, Switchboard has decreased its merchant network revenue by $2.0 million, $4.0 million and $0.4 million for the years ended December 31, 2002, 2001 and 2000, respectively, and reduced its operating expenses by corresponding amounts for the same periods. The adoption of EITF 01-9 had no effect on either the consolidated or Switchboard’s net income or capital resources. The following table illustrates the effect of the application of EITF 01-9 on Switchboard’s results:

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Switchboard:

RESULTS OF OPERATIONS

Services Revenues

Services revenues for 2002 decreased 38% to $32.1 million, compared with $51.7 million in 2001. Services revenues were $61.3 million in 2000. The decrease in 2002 was principally due to lower revenues from our consulting business due to unfavorable economic conditions leading to decreased and deferred technology spending, and from significant declines in revenues from our portal solutions business and our operations in Germany and the United Kingdom which we exited in 2002, combined with lower revenues from our legacy support services. The decrease in 2001 was primarily due to the sale of our Australian subsidiary in March 2001, the closing of our operation in The Netherlands in May 2001 and lower revenues from our portal solutions business.

International revenues for 2002 decreased 97% to $0.2 million, compared with $4.8 million in 2001. International revenues were $9.6 million in 2000. The decrease in 2002 was primarily due to the closure of our operations in the United Kingdom and Germany. The decrease in 2001 was primarily due to the sale of our Australian subsidiary in March 2001 and the closing of our operation in The Netherlands in May 2001.

Services Gross Profit

Gross profits from services in 2002 were 33%, or $10.4 million, compared with 31%, or $15.9 million, in 2001 and 45% or $27.4 million, in 2000. The increase in gross profit percentage in 2002 was primarily due to cost reduction initiatives related to our consulting delivery services which resulted in increased utilization of delivery resources. The decrease in gross profit dollars for 2002 was primarily due to decreases in revenues from consulting business due to unfavorable economic conditions leading to decreased and deferred technology spending, and from significant declines in revenues from our portal solutions business and Germany and the United Kingdom which we exited in 2002, combined with lower revenues from our legacy support services. The decreases in gross profit dollars and percentages in 2001 were primarily due to the sale of our Australian subsidiary in March 2001, the closing of our operation in The Netherlands in May 2001 and lower revenues from our portal solutions business as well as decreased utilization of consulting delivery resources. Cost of services revenues consists primarily of direct costs (e.g. salaries, benefits and travel expenses) of consulting delivery personnel and third-party product costs.

Services Operating Expenses

Sales and marketing expenses for our services business decreased 42% to $10.3 million in 2002, compared with $17.7 million in 2001. Sales and marketing expenses were $20.2 million in 2000. The decrease in 2002 was due primarily to cost reduction initiatives in our domestic and international operations, principally the closing of our operations in Germany and the United Kingdom and staff reductions in our portal solutions business. The decrease in 2001 was due primarily to cost reduction initiatives in our international operations which included the

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sale of our Australian subsidiary and the closing of our operation in The Netherlands, and staff reductions in our portal solutions business. These decreases were offset, in part, by costs relating to increases in sales staff in the United States. Additionally, we incurred approximately $1.7 million of corporate rebranding expense in 2000 relating to the change of our name to ePresence, Inc. from Banyan Systems Incorporated. Sales and marketing expenses as a percentage of services revenues were 32%, 34% and 33% for 2002, 2001 and 2000, respectively. Sales and marketing expenses consist primarily of salaries, associated employee benefits and travel expenses of sales and marketing personnel and promotional expenses.

General and administrative expenses for our services business decreased 26% to $11.1 million in 2002, compared with $15.0 million in 2001 and $14.5 million in 2000. The decrease in 2002 was primarily attributable to a reduction in facility costs, lower depreciation expense, staff reductions and related costs and lower bad debt expense. This decrease was offset partially by professional services expenses incurred in 2002 as a result of amendments to our Annual Report on Form 10-K for the year ended December 31, 2001 and the restatement of the financial statements included therein, and amendments to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. The increase in 2001 was primarily attributable to an incremental bad debt provision for $0.6 million. General and administrative expenses as a percentage of services revenues were 35%, 29% and 24% for 2002, 2001 and 2000, respectively. General and administrative expenses consist primarily of compensation, benefits and travel costs for employees in our management, finance, human resources, information services, legal and operations groups; recruiting and training costs for delivery personnel; costs for facilities; and depreciation expenses not allocated to sales or cost of revenues.

Services Amortization of Goodwill and Intangibles

There was no amortization of goodwill expenses for our services business in 2002 compared with $2.7 million in 2001 and $2.2 million in 2000. This decrease in 2002 is due to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. The increase in 2001 was due to the amortization of goodwill resulting from our acquisition of two services companies in the first and second quarters of 2001. Amortization expense as a percentage of services revenues was 5% for 2001 and 4% in 2000. During 2001 and again in 2002, we determined that the carrying value of goodwill recorded in connection with these prior acquisitions was impaired. Impairment charges totaling $14.8 million and $12.4 million were recorded in 2002 and 2001, respectively, reflecting the amount by which the carrying amount of the assets exceeded their respective fair values. As of December 31, 2002 our goodwill has been fully written off.

Services Restructuring Charges

During 2002, as part of our plan to focus on cost reductions while transitioning to a sales model that aims to lower our cost of sales and capitalize on the strength of our relationships with industry leaders, we recorded total pre-tax charges of $5.1 million. The restructurings were focused principally on the closure of our offices in Germany and the United Kingdom, reductions in our marketing and general and administrative functions and the elimination of several senior management positions. These charges included workforce reductions of approximately 75 positions, office closures and asset write-offs. At December 31, 2002, we had utilized approximately $2.4 million in total of the liability of which $1.0 million was severance related costs, and the remainder related to office closures and asset write-offs. The remaining liability at December 31, 2002 was approximately $2.7 million. We anticipate that we will utilize a substantial portion of the remaining liability by the end of fiscal year 2003. We expect to use $2.5 million of cash related to these activities of which a substantial portion will be expended by the end of fiscal year 2003. See Note 11, Restructuring Charges, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002 which is incorporated from Item 8 herein.

During 2001, as part of our plan to implement cost-cutting measures in its services business, we recorded in total net pre-tax charges of $4.0 million related to workforce reductions, office closures and asset write-offs and

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we anticipate expending approximately $3.0 million in cash over time on such actions. At December 31, 2002, we had utilized approximately $3.5 million in total of the liability of which approximately $2.0 million was severance related costs, and the remainder related to office closures and asset write-offs. The Company expects to use $0.2 million of cash related to these activities.

Switchboard Revenues

Total revenues from Switchboard included in the consolidated financial results of our operations were $11.7 million, $9.3 million and $19.9 million in 2002, 2001 and 2000, respectively, representing an increase of $2.5 million, or 27%, from 2001 to 2002, and a decrease of $10.6 million, or 53%, from 2000 to 2001. The increase in net revenue in 2002 consisted primarily of an increase in net merchant network revenue, offset in part by a decrease in national advertising and site sponsorship revenue. The decrease in net revenue in 2001 when compared to 2000 consisted primarily of decreases in national advertising revenue and site sponsorship revenue, offset in part by an increase in net merchant network revenue.

Switchboard Gross Profit

Gross profits from Switchboard in 2002 were 68.1% of net Switchboard revenue, or $8.0 million, compared with 62% of net Switchboard revenue, or $5.8 million in 2001 and 83%, or $16.4 million, in 2000. The increase in gross profit dollars and percentage in 2002 was primarily due to an increase in net revenue being spread over relatively fixed costs of revenue, offset in part by an increase in lower margin merchant network services revenue. The decrease in gross profit dollars and percentage in 2001 was primarily due to relatively fixed costs of revenue being spread over decreased revenue, as well as a decrease in higher margin national advertising revenue as a percentage of total net revenue.

Switchboard Operating Expenses

Sales and marketing expenses for Switchboard were $4.7 million, $24.6 million and $29.2 million in 2002, 2001 and 2000, respectively, representing a decrease of $19.9 million, or 80%, from 2001 to 2002, and a decrease of $4.6 million, or 16%, from 2000 to 2001. The decrease in 2002 was primarily related to the elimination of the non-cash CBS advertising expense related to Switchboard’s former agreement with Viacom, which accounted for $9.7 million and $11.8 million of Switchboard’s sales and marketing expense during 2001 and 2000, respectively. The decrease in 2002 was also attributable to decreases in other corporate marketing program expenses, employee salaries and benefits resulting primarily from actions taken during Switchboard’s corporate restructuring activities in the three months ended December 31, 2001, provision for doubtful accounts and merchant program expenses. The decrease in 2001 was due primarily to a decrease in merchant services program expenses and CBS advertising expense, offset in part by increases in other advertising expenses, provision for doubtful accounts, employee salaries and benefits and costs associated with additional leased facilities.

Product development expenses for Switchboard were $5.4 million, $6.7 million and $3.5 million in 2002, 2001 and 2000, respectively, representing a decrease of $1.3 million, or 19%, from 2001 to 2002, and an increase of $3.2 million, or 93%, from 2000 to 2001. The decrease in 2002 was due primarily to a decrease in outside consulting expenses, employee salaries and benefits, costs associated with leased facilities and recruiting expenses. The increase in 2001 was due primarily to increases in salaries and benefits associated with new personnel resulting primarily from Switchboard’s acquisition of Envenue, outside consulting expenses, depreciation and costs associated with additional leased facilities, offset in part by the capitalization of deferred project costs.

General and administrative expenses for Switchboard were $4.1 million, $4.2 million and $3.3 million in 2002, 2001 and 2000, respectively, representing a decrease of $0.1 million, or 3%, from 2001 to 2002, and an increase of $0.9 million, or 27%, from 2000 to 2001. The decrease in 2002 was primarily due to a decrease in

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salaries and benefits resulting primarily from actions taken during Switchboard’s corporate restructuring activities in the three months ended December 31, 2001 and a decrease in costs associated with leased facilities, offset in part by an increase in expenses for professional services incurred as a result of amendments to Switchboard’s Annual Report on Form 10-K for the year ended December 31, 2001, and the restatement of the financial statements included therein and amendments to Switchboard’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. The increase in 2001 was due primarily to increases in professional services, insurance expenses, and salaries and benefits associated with new personnel, offset in part by a decrease in franchise and excise taxes.

Switchboard Amortization of Goodwill, Intangibles and Other Assets

Switchboard expenses for the amortization of goodwill, intangibles and other assets was zero, $0.7 million, and $1.2 million in 2002, 2001 and 2000, respectively, representing a decrease of $0.7 million, or 100%, from 2001 to 2002, and $0.4 million, or 38%, from 2000 to 2001. The decrease in 2002 resulted primarily from the absence in 2002 of amortization of goodwill resulting from Switchboard’s acquisition of Envenue, which was fully amortized as of December 2001 as a result of an impairment analysis, and amortization expense associated with a software license, which were written off in December 2001. The decrease in 2001 resulted primarily from the absence in 2001 of amortization of the value of warrants issued in connection with a co-branded web site and linking agreement, and a reduction in amortization expense associated with a software license, offset in part by an increase in amortization of goodwill resulting from Switchboard’s purchase of Envenue in November 2000.

Switchboard Loss on Viacom Transaction

As a result of Switchboard’s October 2001 restructuring of its relationship with Viacom, Switchboard reported a one-time, non-cash accounting loss of $22.2 million in 2001 related to the termination of Switchboard’s advertising and promotion agreement with Viacom. Switchboard agreed to terminate their right to the placement of advertising on Viacom’s CBS properties with an expected net present value of approximately $44.5 million in exchange for, primarily, the reconveyance by Viacom to Switchboard of approximately 7.5 million shares of Switchboard common stock, the cancellation of warrants held by Viacom to purchase 533,469 shares of Switchboard’s common stock and the reconveyance to Switchboard of the one outstanding share of Switchboard’s series E special voting preferred stock. The non-cash accounting loss of $22.2 million results from the difference between the net present value of Switchboard’s remaining advertising rights with Viacom, which were terminated, and the value of the shares of Switchboard’s common and preferred stock that were reconveyed and the warrants that were cancelled.

Switchboard Special (Credits)/Charges

In the three months ended December 31, 2002, Switchboard recorded the reversal of $0.3 million in excess restructuring reserves as a special credit. This reversal resulted primarily from better than expected experience in the subleasing of idle office space for which Switchboard had reserved as part of its 2002 special charges.

In December 2001, Switchboard recorded net pre-tax special charges of approximately $17.3 million, comprised primarily of $15.6 million for the impairment of certain assets, $1.0 million for costs related to facility closures and $0.7 million in severance costs related to the reduction of approximately 21% of Switchboard’s workforce. The restructuring resulted in 21 employee separations. These facility closures and employee separation activities were substantially completed during 2002.

Included in the $15.6 million impairment charge for certain assets is an amount recorded for the impairment of the unamortized portion of the value of the Switchboard common stock issued and amounts prepaid to AOL. Switchboard assessed the value of its assets related to its AOL Directory Agreement for impairment as revenues were lower at the end of the first year of the Directory Agreement than originally anticipated. Based upon an impairment analysis which indicated that the carrying amount of these assets would not be fully recovered

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through estimated undiscounted future operating cash flows, a charge of $11.7 million was recorded by Switchboard as an additional component of special charges during 2001. The impairment was measured as the amount by which the carrying amount of these assets exceeded the present value of the estimated discounted future cash flows attributable to these assets.

In December 2001, Switchboard exercised its rights under the Envenue acquisition agreement to substantially reduce the funding of Envenue. Switchboard evaluated the carrying value of its goodwill in Envenue, and determined it would not be fully recovered through estimated undiscounted future operating cash flows. As a result, during the three months ending December 31, 2001, Switchboard recorded as a component of the $15.6 million impairment charge for certain assets an impairment charge of $1.9 million related to the Envenue goodwill. The impairment was measured as the amount by which the carrying amount of these assets exceeded the present value of the estimated discounted future cash flows attributable to these assets.

Also included in the impairment charge for certain assets are amounts related to prepaid advertising expenses. As a result of Switchboard’s change in overall strategy from a destination site to a technology provider, Switchboard no longer considered this prepaid advertising to be complementary to its corporate strategy. Accordingly, Switchboard recorded $1.4 million for the impairment of these prepaid advertising assets.

Of the total $1.4 million facilities and severance charge, which is net of the $0.3 million special credit recorded in 2002, Switchboard currently estimates that $1.2 million is cash related. As of December 31, 2002, $1.3 million of the original $1.4 million accrual had been utilized. A liability of $0.1 million remains on both our Consolidated Balance Sheet and Switchboard’s balance sheet as of December 31, 2002 relating to the special charges.

Consolidated Other Income/(Expense) and Income Taxes

Consolidated other income was $5.2 million in 2002, $73.0 million in 2001 and $59.9 million in 2000. The decrease in 2002 is primarily due to the liquidation of our Openwave position in 2001 as well as our minority interest share of decreased losses in Switchboard and a reduction in interest income. The increase in 2001 was due primarily to a gain on sale of Openwave stock of approximately $33.4 million for 2001. The increase in 2001 was also due to the minority share of increased losses in Switchboard.

While we incurred significant pretax losses in 2002 and 2001, we recorded a provision for income taxes in each of those years. The provision for income taxes in 2002 is primarily for state income taxes. We recorded no tax benefit on our operating losses for the year ended December 31, 2002, due to the uncertainty of its realization. The provision for income taxes in 2001 is primarily the result of the significant gain on the sale of Openwave stock and due to the fact that Switchboard’s results (and net operating losses) are not consolidated with ours for income tax purposes.

We periodically evaluate the realizability of all of our deferred tax assets. Because we believe it is more likely than not that all of the deferred tax assets will not be realized, valuation allowances of $62,325,000 and $51,378,000 for the years ended December 31, 2002 and 2001, respectively were recorded. Of the valuation allowances for the years ended December 31, 2002 and 2001, respectively, $22,275,000 and $24,373,000 pertains to Switchboard, while $40,050,000 and $27,005,000 pertains to the services segment.

Our effective tax rate for the year ended December 31, 2000 was 49.3%. This was negatively impacted by our deconsolidation of Switchboard for tax purposes, as Switchboard’s net losses are not included in our tax return, upon our percentage ownership change on June 30, 1999.

Other Matters

On January 1, 2001 we were party to two separate hedging contracts related to our investment in Openwave. Since we did not designate these hedges, the fair market value of these hedges ($5.3 million at January 1, 2001)

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was recorded as an asset and, accordingly, we recorded a cumulative effect in accounting change, net of taxes, of $3.5 million (an earnings per share impact of $0.15). Upon liquidation of the Openwave investment, these hedges were terminated and were offset against the gain from the sale of Openwave. These changes had no effect our consolidated net income for the period ending December 31, 2001. Aside from these hedges, at January 1, 2001 and through December 31, 2001, we were not party to any other derivative instruments.

For a further discussion of the our relationship with Switchboard, see Note 27, Related Parties, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002 which is incorporated from Item 8 herein. For a further discussion of Switchboard’s relationship with AOL, see Note 26, AOL Alliance in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002 which is incorporated from Item 8 herein.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, consolidated cash, cash equivalents, marketable securities and restricted cash were $105.3 million, of which $51.4 million was held by ePresence and $53.9 million was held by Switchboard. At December 31, 2001, consolidated cash, cash equivalents, marketable securities and restricted cash were $122.1 million, of which $62.1 million was held by ePresence and $60.0 million was held by Switchboard. Consolidated working capital increased from $72.6 million at December 31, 2001 to $82.9 million at December 31, 2002. Cash and cash equivalents, excluding restricted cash of $1.6 million and $0.9 million for 2002 and 2001, respectively, increased $40.2 million resulting in a consolidated cash balance of $73.2 million at December 31, 2002. This increase was primarily due to net cash used in operating activities of $14.5 million and cash used in financing activities of $1.1 million offset in part by cash provided by investing activities of $55.4 million as follows.

Net cash used in operating activities in 2002 of $14.5 million was primarily due to a net loss of $31.7 million, a decrease in accounts payable and accrued expenses of $9.6 million and a decrease in deferred revenues of $3.4 million. These uses were offset in part by the non-cash charge for the impairment of goodwill of $14.8 million, a decrease in accounts receivable of $6.4 million, a decrease in other current assets of $3.6 million, the non-cash portion of our restructuring and Switchboard’s special charges of $3.2 million, and depreciation and amortization of $2.5 million.

We expect liquidity and capital resources to continue to decrease during 2003, primarily as a result of anticipated continued operating losses.

Net cash used in financing activities in 2002 of $1.1 million was primarily due to payments on capital leases and notes payable by Switchboard of $1.8 million, $1.3 million in stock repurchases by Switchboard and $1.1 million in stock repurchases pursuant to the Company’s stock buyback program. These uses were offset, in part, by proceeds from issuance of notes payable of $2.7 million by Switchboard.

Net cash provided by investing activities in 2002 of $55.4 million was primarily related to the proceeds from sale of marketable securities of $57.1 million, offset, in part, by capital expenditures of $0.9 million and by an increase in restricted cash of $0.8 million.

On December 18, 2000, the Board of Directors of ePresence authorized the repurchase of up to $10.0 million of its common stock on the open market. Repurchases of stock are at management’s discretion, depending upon acceptable prices and availability. Funds used in the repurchase of shares come from our existing cash and investment balances along with cash generated from operations. As of December 31, 2002, we have expended $7.4 million toward stock repurchases pursuant to this repurchase program.

For a discussion of our lease commitments, see Note 13, Commitments and Contingencies, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002 which are incorporated from Item 8 herein.

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The following table summarizes our consolidated long-term contractual obligations as of December 31, 2002:

(a) Consists of scheduled principal payments on Switchboard’s Financing Agreement with Silicon Valley Bank (“SVB”).

On November 7, 2002, we entered into a $10.0 million revolving line of credit with SVB, that provides for borrowings at SVB’s prime rate. This credit agreement has a one-year term and contains covenants relating to the maintenance of certain financial ratios. We had no borrowings under this line of credit outstanding at December 31, 2002.

In June 2002, Switchboard entered into a loan and security agreement with SVB (the “SVB Financing Agreement”), under which Switchboard has the ability to borrow up to $4.0 million for the purchase of equipment. Amounts borrowed under the facility accrue interest at a rate equal to prime plus 0.25%, and are repaid monthly over a 30-month period. As of December 31, 2002, Switchboard had utilized $2.7 million of this facility. The facility provided for the ability to fund additional equipment purchases of up to $1.3 million through March 31, 2003. Switchboard did not utilize the facility in the three months ended March 31, 2003 to fund additional equipment purchases. The agreement also provides for a $1.0 million revolving line of credit. At December 31, 2002, Switchboard had no outstanding borrowings under the revolving line of credit.

As a condition of the SVB Financing Agreement, Switchboard is required to maintain in deposit or investment accounts at SVB not less than 95% of its cash, cash equivalents and marketable securities. Additionally, covenants in the agreement require Switchboard to maintain in deposit or in investment accounts with SVB at least $20.0 million in unrestricted cash. As part of the transition to SVB, Switchboard liquidated $35.7 million in marketable securities previously held at Fleet for transfer to SVB. As a result of this liquidation, Switchboard recorded $402,000 in realized gains during 2002. These amounts have been transferred to SVB.

We believe that existing cash and marketable securities, combined with cash expected to be generated from operations, will be sufficient to fund our operations through at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We consider certain accounting policies related to revenue recognition, accounts receivable, consolidation of Switchboard results with its financial results, impairment of long-lived assets and valuation of deferred tax assets to be critical policies due to the estimation processes involved in each.

Revenue Recognition

We recognize services revenues pursuant to time-and-material contracts generally as services are provided. Services revenues pursuant to fixed-fee contracts are generally recognized as services are rendered on the percentage-of-completion method of accounting (based on the ratio of costs incurred to total estimated costs) with revisions to estimates reflected in the period which changes become known. Service revenues include customer reimbursements for out-of-pocket expenses.

Our services business derives a significant portion of its revenue from fixed-price, fixed-time contracts, which require the accurate estimation of the cost, scope and duration of each engagement. If we do not accurately

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estimate the resources required or the scope of time to satisfy our obligations under the contracts, then future consulting margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to our results of operations.

Switchboard generates its revenue primarily from its merchant network and banner and site sponsorship advertising. Generally, revenue is recognized as services are provided, so long as no significant obligations remain and collection of the resulting receivable is probable. Switchboard believes that they are able to make reliable judgments regarding the creditworthiness of its customers based upon historical and current information available to them. There can be no assurances that their payment experience with their customers will be consistent with past experience or that the financial condition of these customers will not decline in future periods, the result of which could be Switchboard’s failure to collect invoiced amounts. Some of these amounts could be material, resulting in an increase in our provision for bad debts.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our customers on an ongoing basis and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable at December 31, 2002 are concentrated in a relatively few number of customers (one customer accounts for 11% of consolidated accounts receivable at December 31, 2002), a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.

Restructuring Charges

We established exit plans for each of the restructuring activities which took place in 2001 and 2002 and accounted for these plans in accordance with EITF Issue No. 94-3, “Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)” and SEC Staff Accounting Bulletin No. 100 (“SAB 100”), “Restructuring and Impairment.” In accordance with EITF Issue No. 94-3 and SAB 100, management makes certain judgmental estimates related to these restructuring charges. We specifically identified all positions which were to be eliminated and notified the affected employees prior to the end of the quarter in which the related restructuring charge was recorded. The consolidation of facilities required us to make estimates including with respect to contractual rental commitments or lease buy-outs for office space being vacated and related costs, and leasehold improvement write-downs, offset by estimated sub-lease income. We review on at least a quarterly basis our sub-lease assumptions. These estimates include anticipated rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. If the rental markets change, our sub-lease assumptions may not be accurate and changes in these estimates might be necessary but would not materially affect our financial condition and results of operations. For a further discussion of our restructuring activities, see Note 11, Restructuring Charges, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2002, which are incorporated from Item 8 herein.

Consolidation of Switchboard results with the financial results of the Company

Historically, Switchboard’s results have been consolidated with our financial results, due to either our majority ownership of Switchboard or our control of the Switchboard Board of Directors as a result of a Voting Rights Agreement by and among the Company, Switchboard and Viacom. However, in January 2001, as a result of the termination of this Voting Rights Agreement and our ownership then being 38%, we ceased to consolidate Switchboard’s results with our financial results, for the first three quarters of 2001. In connection with the

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Viacom transaction discussed in Note 25 in the Company’s Notes to Consolidated Financial Statements, we became owner of approximately 54% of Switchboard’s outstanding stock in October 2001. This change in ownership percentage resulted in us retroactively consolidating Switchboard’s revenues, expenses and other income and expense in our consolidated statement of operations, while the minority interest in Switchboard was eliminated through consolidated other income and expense as of January 1, 2001. Accordingly, the results of operations for 2002, 2001 and 2000 respectively, are presented consistently herein on a consolidated basis. In addition, Switchboard’s assets and liabilities are consolidated in our consolidated Balance Sheet as of December 31, 2002 and December 31, 2001. At December 31, 2002, we owned 9,802,421 shares or an approximate 52% equity interest of Switchboard’s outstanding common stock.

As a result of the consolidation of Switchboard’s results, our consolidated financial results and condition are materially affected by Switchboard’s financial results and condition. Our consolidated financial results and condition would also be materially affected if in the future Switchboard’s financial results and condition ceased to be consolidated with ours

Impairment of Long-lived Assets

Our long-lived assets include goodwill and acquired intangible assets pursuant to our acquisition of ePresence, Inc. (currently named ePresence Web Consulting, Inc.) in January 2000 and our acquisition of Strategic Network Designs, Inc. (currently named ePresence CRM, Inc.) in May 2000. At December 31, 2001, we had $14.8 million of goodwill and other intangible assets, accounting for approximately 9.1% of our total assets. We evaluate the net realizable value of our goodwill and intangibles on an ongoing basis, relying on a number of factors including operating results, business plans, budgets, economic projections and undiscounted cash flows. In addition, our evaluation considers non-financial data such as market trends, project development cycles and changes in management’s market emphasis. During 2001, based on economic conditions and each business unit’s actual and forecasted operating results, it became apparent that the carrying value of the acquired intangible assets and goodwill had been impaired. In September 2001, a charge of $12.4 million was recorded related to the impairment of goodwill measured as the amount by which the carrying amount exceeded the present value of the estimated discounted future cash flows for goodwill.

In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, we ceased to amortize approximately $14.8 million of goodwill. We had recorded approximately $2.7 million of amortization during 2001 and would have recorded approximately $1.8 million of amortization during 2002. In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We adopted SFAS No. 142 during the first quarter of 2002 and ceased amortizing goodwill with a net book value of $14.8 million as of the beginning of fiscal 2002. We completed an assessment of fair value of goodwill in the second quarter of 2002 and updated the assessment in the third quarter of 2002 due to a continued decline in economic conditions. Neither of these assessments indicated an impairment of goodwill. However, in the fourth quarter of 2002, we completed our yearly assessment of fair value of goodwill, and based upon this impairment analysis, the results indicated that the carrying amount of the goodwill would not be fully recovered through estimated undiscounted future operating cash flows and an impairment charge of $14.8 million was recorded during the year ended December 31, 2002. The impairment of goodwill was measured as the amount by which the carrying amount exceeded the present value of the estimated discounted future cash flows attributable to such goodwill.

Valuation of Deferred Tax Assets

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheet. We must then assess the likelihood that

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our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $62.3 million as of December 31, 2002, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carryforwards and tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

The net deferred tax asset as of December 31, 2002 was zero, net of a valuation allowance of $62.3 million.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2002, the Emerging Issues Task Force issued Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred (“EITF No. 01-14”), relating to the accounting for reimbursements received for out-of-pocket expenses. In accordance with EITF No. 01-14, reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the statement of operations. EITF No 01-14 is effective for all financial reporting periods beginning after December 15, 2001, and upon adoption there is a requirement to present comparative prior period financial information. We have historically accounted for reimbursements received for out-of-pocket expenses incurred as revenue and recorded the applicable cost as cost of revenue. As a result, the adoption of EITF No 01-14 did not have an impact on our financial position, results of operations or cash flows.

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is effective for us on January 1, 2003. SFAS No. 146 creates a model whereby liability is recognized at fair value in period occurred rather than at date of commitment to a plan. We do not expect the adoption of SFAS No. 146 to have a material impact on our financial position, results of operations and cash flows.

In November 2002, the FASB’s Emerging Issues Task Force finalized EITF Issue No. 00-21 (EITF 00-21), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. However, it does not address when the criteria for revenue recognition are met or provide guidance on the appropriate revenue recognition convention for a given unit of accounting. EITF 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, and early application is permitted. Upon adoption, entities may elect to either apply EITF 00-21 prospectively or report the change in accounting as a cumulative-effect adjustment. The adoption of EITF 00-21 is not expected to have a significant impact on us.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at

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the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 is not expected to have a material impact on our financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) to clarify the conditions under which assets, liabilities and activities of another entity should be consolidated into the financial statements of a company. FIN 46 requires the consolidation of a variable interest entity by a company that bears the majority of the risk of loss from the variable interest entity’s activities, is entitled to receive a majority of the variable interest entity’s residual returns, or both. The provisions of FIN 46, required to be adopted in fiscal 2003, are not expected to have a material impact on our financial position or results of operations.

FACTORS AFFECTING FUTURE OPERATING RESULTS

Certain of the information contained in this Annual Report on Form 10-K, including, without limitation, information with respect to our plans and strategy for our business, statements relating to the sufficiency of cash and cash equivalent balances, anticipated expenditures, the anticipated effects of our cost reduction measures including the discontinuation of our remaining operations in Europe, and our sales and marketing and product development efforts, consists of forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “expects,” “anticipates,” “plans,” and similar expressions are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include the following factors:

The continuing stock market decline, broad economic slowdown and global political uncertainty has affected the demand for services, lengthened the sales cycles and caused decreased technology spending for many of our customers and potential customers. If companies continue to cancel or delay their business and technology consulting initiatives because of the current economic and political climate, or for other reasons, our business, financial condition and results of operations could be materially adversely affected.

During 2002 and in 2001, we restructured our operations through workforce reductions and office closures. Such restructurings could have an adverse effect on our business, including on our ability to attract and retain customers and employees, and there can be no assurance that we will achieve the anticipated financial benefits of these restructurings. In addition, there can be no assurance that our workforce reductions will not have a material adverse effect on our business and operating results in the future.

Our future success will depend in part upon our ability to continue to grow our services business, enter into new strategic alliances, acquire additional services customers and adapt to changing technologies and customer requirements. Any failure to do so could have a material adverse effect on us. We have a limited operating history as a services company. In addition, the market for our consulting services and the technologies used in our solutions have been changing rapidly and we expect this level of change to continue. If we cannot keep pace with these changes in our marketplace, our business, financial condition and results of operations will suffer. There can be no assurance we will be successful in our strategic focus on services, including SIM services.

We sell our services principally through a direct sales force to customers in a broad range of industries. We do not require collateral or other security to support customer receivables. Conditions affecting any of our clients could cause them to become unable or unwilling to pay us in a timely manner, or at all, for services we have already performed. Our financial results and condition could be adversely affected by credit losses.

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We have a number of partnerships and alliances with software vendors under which we provide services around such vendors’ products. Any failure of these alliances to generate the anticipated level of sales, the loss of one or more of these alliances, or the failure to enter into additional strategic alliances, could have a material adverse effect on us.

We are dependent upon the continued services of our key management and technical personnel. In addition, as a services company, our business is particularly dependent on our employees. Competition for qualified personnel is strong, and there can be no assurance we will be able to attract and retain qualified management and other employees.

We were not profitable during 2002 and 2001, and there can be no assurance we will return to profitability in 2003 or in any future period. Continued losses could have a material adverse effect on our liquidity and capital resources.

Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our expenses, such as personnel and rent, are and will continue to be fixed in the short-term. We may not be able to quickly reduce spending if our revenues are lower than we had projected. As a result, an unanticipated decrease in the number, or an unanticipated slowdown in the scheduling, of our projects may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations for that quarter. If we do not achieve our expected revenues, our operating results will be below our expectations and the expectations of investors and market analysts, which could cause the price of our common stock to decline. Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future, making it difficult to predict future performance. These variations result from a number of factors, many of which are outside of our control. Because of this difficulty in predicting future performance, our operating results will likely fall below the expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our common stock.

The market for our products is highly fragmented and characterized by continuing technological developments, evolving and competing industry standards, and changing customer requirements. We expect competition to persist and intensify in the future. Some of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies can also leverage extensive customer bases, have broad customer relationships and have broad industry alliances, including relationships with certain of our current and potential customers. In addition, certain competitors may adopt aggressive pricing policies or may introduce new services. Competitive pressures may make it difficult for us to acquire and retain customers and could require us to reduce the price of our services. We cannot be certain that we will be able to compete successfully with existing or new competitors. Our failure to maintain and enhance our competitive position would limit our ability to retain and increase our market share, resulting in serious harm to our business and operating results.

Our future success depends on the increased acceptance and use of advanced technologies as a means for conducting commerce and operations. If use of these advanced technologies does not continue to grow, or grows more slowly than expected, our revenue growth could slow or decline and our business, financial condition and results of operations could be materially adversely affected. Businesses may delay adoption of advanced technologies for a number of reasons, including inability to implement and sustain profitable business models using advanced technologies; inadequate network infrastructure or bandwidth; delays in the development or adoption of new technical standards and protocols required to handle increased levels of usage; delays in the development of security and authentication technology necessary to effect secure transmission of confidential information; and failure of companies to meet their customers’ expectations in delivering goods and services using advanced technologies.

Our services rely upon third-party technologies. Our business could be harmed if providers of such software and technology utilized in connection with our services ceased to deliver and support reliable products, enhance

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their current products in a timely fashion or respond to emerging industry standards. In addition, if we or our customers cannot maintain licenses to key third-party software, provision of our services could be delayed until equivalent software could be licensed and integrated into our services, or we might be forced to limit our service offerings. Either alternative could materially adversely affect our business, operating results and financial condition.

Some of our contracts can be canceled by the customer with limited advance notice and without significant penalty. Termination by any customer of a contract for our services could result in a loss of expected revenues and additional expenses for staff which were allocated to that customer’s project. We could be required to maintain underutilized employees who were assigned to the terminated contract. The unexpected cancellation or significant reduction in the scope of any of our large projects could have a material adverse effect on our business, financial condition and results of operations.

A significant portion of our projects are based on fixed-price, fixed-timeframe contracts, rather than contracts in which payment to us is determined on a time and materials basis. Our failure to accurately estimate the resources required for a project, or our failure to complete our contractual obligations in a manner consistent with the project plan upon which our fixed-price, fixed-timeframe contract was based, could adversely affect our overall profitability and could have a material adverse effect on our business, financial condition and results of operations. We have been required to commit unanticipated additional resources to complete projects in the past, which has resulted in losses on those contracts. We will likely experience similar situations in the future and the consequences could be more severe than in the past, due to the increased size and complexity of our engagements. In addition, we may fix the price for some projects at an early stage of the process, which could result in a fixed price that turns out to be too low and, therefore, would adversely affect our business, financial condition and results of operations.

Any failure by us to effectively identify and acquire complementary businesses or SIM-focused software, integrate such businesses or software, as the case may be, and any failure of such companies or software to perform as expected could have a material adverse effect on us. Any acquisition for cash could have a significant impact on our liquidity and capital resources, and any acquisition for stock could involve significant dilution for our stockholders.

We own 9,802,421 shares of Switchboard’s common stock, which is traded on the NASDAQ National Market. The trading price of Switchboard’s common stock is likely to be volatile and may be influenced by many factors, including, without limitation, variations in financial results, changes in earnings estimates by industry research analysts, the failure or success of branding and strategic initiatives and investors’ perceptions. Volatility in the trading price of Switchboard’s common stock could have a material adverse effect on our financial condition. In addition, due to our level of ownership of Switchboard, the trading price of our common stock is likely to be influenced by the trading price of Switchboard’s common stock. If Switchboard’s trading price declines, the trading price of our common stock will likely decline as well.

Switchboard’s results of operations are consolidated as part of our results of operations. Switchboard, which has a history of incurring net losses, expects its net losses to continue partially through 2003 and may never achieve profitability. In addition, Switchboard’s quarterly results of operations have fluctuated significantly in the past and are likely to fluctuate significantly from quarter to quarter in the future. Factors that may cause Switchboard’s results of operations to fluctuate include: the success of Switchboard’s relationship with AOL; the addition or loss of relationships with third parties that are Switchboard’s source of new merchants for its local merchant network or that license Switchboard’s services for use on their own web sites; Switchboard’s ability to attract and retain consumers, local merchants and national advertisers to its web site; the amount and timing of expenditures for expansion of Switchboard’s operations, including the hiring of new employees, capital expenditures and related costs; technical difficulties or failures affecting Switchboard’s systems or the Internet in general; the cost of acquiring, and the availability of, content, including directory information and maps; Switchboard’s expenses, which are largely fixed, particularly in the short-term, are partially based on expectations regarding future revenue; the cost and risks associated with any acquisition, and Switchboard’s ability to attract and retain highly skilled managerial and technical personnel.

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In addition, Switchboard has only a limited operating history and until March 2000 had no operating history as a stand-alone company and no experience in addressing various business challenges without the support of a corporate parent. It may not be successful as a stand-alone company.

William P. Ferry, our Chairman of the Board, President and Chief Executive Officer, is Switchboard’s Chairman of the Board, and Richard M. Spaulding, our Senior Vice President and Chief Financial Officer, and Robert M. Wadsworth, one of our directors, are directors of Switchboard. Serving as a director of Switchboard and as either a director or an officer of ePresence could create, or appear to create, potential conflicts of interest when those directors and officers are faced with decisions that could have different implications for us than for Switchboard. Such conflicts, or potential conflicts, of interest could hinder or delay our management’s ability to make timely decisions regarding significant matters relating to our business.

Because of the foregoing factors and the other factors we have disclosed from time to time, we believe that period-to-period comparisons of our financial results are not necessarily meaningful and you should not rely upon these comparisons as indicators of our future performance. We expect that our results of operations may fluctuate from period-to-period in the future.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Marketable Securities and Interest Rates

We are exposed to financial market risks, including changes in interest rates. Our marketable securities as of December 31, 2002, are invested in US agencies bonds and notes and repurchase agreements. The majority of our investments have maturities between one and three years. A significant portion of our cash is invested in short-term interest-bearing securities. While we have in the past used hedging contracts to manage exposure to changes in the value of marketable securities, we are not currently a party to any such contract. We may use hedging contracts in the future. The fair value of our investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of our investment portfolio. These potential changes are based on sensitivity analysis performed on our balances as of December 31, 2002.

Foreign Currency

Prior to January 1, 2002, our subsidiaries generally used the local currency as the functional currency. Assets and liabilities were translated into U.S. dollars at the period ended exchange rate and income and expense amounts were translated using the average rate prevailing for the period. Adjustments resulting from translation were included in accumulated other comprehensive income.

As of January 1, 2002, our remaining subsidiaries began using the U.S. dollar as the functional currency as we had substantially liquidated our remaining foreign subsidiaries. As a result, the translation gains/losses are included in net loss for 2002. Prior cumulative translation gains/losses within accumulated comprehensive income have been reversed and included in the net loss in 2002. To date, foreign currency exchange rate fluctuations have not had a material effect on our operating results or financial condition.

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ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

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REPORT OF INDEPENDENT AUDITORS

To The Board of Directors and Stockholders of ePresence Inc.:

We have audited the accompanying consolidated balance sheet of ePresence Inc. as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 16. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 ePresence, Inc. at December 31, 2002 and 2001 and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 6 to the financial statements, in 2002 the Company changed its method of accounting for goodwill.

/s/ Ernst & Young LLP

January 23, 2003, except for the Settlement

of the lawsuit described in Note 13, as to

which the date is February 19, 2003

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of ePresence, Inc.:

In our opinion, the consolidated statement of operations, shareholders’ equity and cash flows for the year ended December 31, 2000 (appearing on pages 33 through 35 of this Form 10-K) present fairly, in all material respects, results of operations and cash flows of ePresence, Inc. and its subsidiaries at December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Boston, Massachusetts

February 1, 2001

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ePRESENCE, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

(in thousands, except share and par amounts)

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

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ePRESENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2002, 2001 and 2000

(in thousands, except share and per share amounts)

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ePRESENCE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2002, 2001 and 2000

(in thousands, except share amounts)