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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2003

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-30389

EXE TECHNOLOGIES, INC.

8787 Stemmons Freeway
Dallas, Texas 75247
(Address including zip code of principal executive offices)

(214) 775-6000
(Registrant’s telephone number, including area code)

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

YES [   ] NO [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2003.

Common stock, $0.01 par value, 6,665,681 shares outstanding.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Principles of Consolidation and Basis of Presentation

     EXE Technologies, Inc. (the Company or EXE) provides software that drives customers’ supply chain execution processes, including fulfillment, warehousing, distribution, and inventory management. The Company operates from its headquarters in Dallas, Texas, and through its various subsidiary and sales offices serving North America, Europe, the Middle East, Asia and Australia. The accompanying unaudited consolidated financial statements include the accounts of EXE Technologies, Inc. and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for fiscal year end financial statements. In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation of the results have been included for the interim periods presented. Operating results for the three month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2003. These statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Form 10-K for the year ended December 31, 2002.

     All share and per share amounts in the accompanying financial statements and footnotes have been adjusted to reflect the Company’s one for seven reverse stock split which was effective January 2, 2003.

2. Net Loss Per Share

     The Company computes net income (loss) per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (SFAS 128). Basic net income (loss) per common share is computed using the weighted average number of shares of common stock outstanding during each period.

     Diluted net income (loss) per common share is computed using the weighted average number of shares of common stock outstanding during each period and common equivalent shares consisting of preferred stock, warrants and stock options (using the treasury stock method), if dilutive. Diluted loss per common share is the same as basic loss per common share for all periods presented because all potentially dilutive securities were anti-dilutive. The following table sets forth anti-dilutive securities that have been excluded from diluted earnings per share for the periods presented:

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

3. Comprehensive Loss

     Comprehensive loss includes foreign currency translation gains (losses) and unrealized gains (losses) on securities available for sale. The following table sets forth the calculation of comprehensive loss for the periods presented:

4. Derivative Financial Instruments

     In January 2001, the Company began a foreign currency-hedging program to hedge certain nonfunctional currency exposure. Forward currency exchange contracts are utilized by the Company to reduce foreign currency exchange risks with the goal of offsetting foreign currency transaction gains and losses recorded for accounting purposes with gains and losses realized on the forward contracts. The Company does not hold derivative financial instruments for trading or speculative purposes.

     As of March 31, 2003, the Company had an outstanding forward currency exchange contract of $3.0 million to sell Japanese Yen that hedges certain foreign currency exposures. Gains and losses arising from the changes in the fair value of forward currency exchange contracts are recognized as a component of other income (expense). At March 31, 2003, the current market settlement values of the forward contracts would result in a loss of approximately $0.1 million.

5. Stock-Based Compensation Plans

     The Company accounts for its stock-based compensation plans utilizing the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Under APB 25, if the exercise price of an employee’s stock option equals or exceeds the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. Any compensation expense associated with employee stock options is recognized ratably over the vesting period of the underlying option. The Company accounts for stock-based compensation for non-employees under the fair value method prescribed by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).

     Although SFAS 123 allows the APB 25 guidelines to be applied to accounting for stock options, SFAS 123 requires the disclosure of pro forma net income (loss) and earnings (loss) per share information as if the Company had accounted for its employee stock options under the fair value method. The following table sets forth the pro forma information as if the provisions of SFAS 123 had been applied to account for stock-based employee compensation:

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

     The fair value for options was estimated at the date of grant using a Black-Scholes options pricing model and the following weighted-average assumptions for the three months ended March 31, 2002 and 2003: a risk-free interest rate of 4.47% in 2002 and 2.07% in 2003, no dividend, an expected life of three to five years, and a volatility of 0.93 for grants in 2002 and 0.70 for grants in 2003.

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

6. Segment Information

     The Company provides software that drives customers’ supply chain execution processes, including fulfillment, warehousing, distribution, and inventory management. All financial information is reviewed on a consolidated basis with additional information by geographic region used to make operating decisions and assess the results of the Company. Total assets are presented net of intercompany receivables and payables. The Company’s geographic information as of and for the three months ended March 31, 2002 and 2003 is as follows:

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EXE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

7. Commitments and Contingencies

     The Company is involved in various legal actions and claims that arise in the normal course of business. In the opinion of management, the final disposition of these matters will not have a material adverse effect on the Company’s business, financial condition, cash flows or results of operations. The Company establishes accruals for losses related to such matters that are probable and reasonably estimable. However, an unfavorable outcome of some or all of these matters could have a material effect on the Company’s business, financial condition, cash flows and results of operations.

8. Employee Severance and Lease Abandonment

     During the years ended December 31, 2001 and 2002, the Company implemented various cost reduction actions to lower the Company’s cost structure, including employee severance, the write off of equipment and the abandonment of certain leased facilities. As a result, charges totaling approximately $14.3 million and $9.7 million were charged against operating results in 2001 and 2002, respectively. None of these charges were recorded in the first quarters of 2002 or 2003. The 2002 charges include approximately $1.4 million in severance paid to the Company’s former Chief Executive Officer in March 2003, in accordance with his employment agreement.

     The Company has made cash payments of approximately $11.7 million, of which approximately $2.8 million was paid during the first quarter of 2003, and has written-off approximately $1.6 million in non-cash charges against the reserves established for these various cost reduction actions. The remaining liability at March 31, 2003 is approximately $10.7 million, of which $7.5 million is long-term and is expected to be paid through 2009. The reserves include estimates pertaining to sublease rates, vacancy periods, employee separation costs and settlement of contractual obligations. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates.

9. Related Party Transactions

     In October 2002, the Company entered into an agreement with a company in India to provide development services, with a minimum obligation of $2.1 million over a three-year period. A shareholder of the Company, who owns approximately 6% of the outstanding shares, has an indirect financial interest in the India operation. The Company believes that the terms of this agreement are on an arms length basis.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the Certain Factors That May Affect Future Results included elsewhere in this Form 10-Q and the Company’s Critical Accounting Policies and Estimates included in the Company’s Form 10-K for the year ended December 31, 2002.

Overview

     We provide software that drives customers’ supply chain execution processes, including fulfillment, warehousing, distribution and inventory management. Our software solutions deliver the vital, frontline supply chain intelligence necessary to drive customer execution decisions and processes. Our products and services help customers worldwide to increase revenue, reduce distribution costs, manage inventory across the supply chain, and improve customer loyalty and satisfaction. We provide global service and support for our software from established facilities in North America, Europe, the Middle East, Asia, and Australia.

     In October 2002, we were notified by the NASDAQ Stock Market, Inc. that our common stock price had failed to maintain a minimum closing bid price greater than or equal to $1.00 for 30 consecutive trading days and thereby subjected our common stock to possible delisting from NASDAQ. In response, effective January 2, 2003, we completed a one for seven reverse stock split.

     We derive our revenue from the sale of software licenses; product related consulting, training, maintenance and support (collectively, “services and maintenance”); and the resale of software and equipment.

     Our business has been adversely impacted for the last two years by a number of factors. A major factor has been the global slowdown in customer spending for large-scale IT projects. Additionally, certain actions taken by us to improve operating performance did not deliver the anticipated results. As a result, our revenue has continued to decline and we continue to incur operating losses.

     In response to the less than satisfactory operating performance, we have taken a number of actions in 2002 to improve operating performance. First, we have substantially reduced our cost structure to more closely align with our current levels of revenue. These actions included, among other things, a 17% reduction in global headcount, the closure of our Philadelphia office, the consolidation of our North American professional services and development operations in Dallas and expanding our lower-cost offshore development activities. We also replaced our Chief Executive Officer and Chief Financial Officer, and eliminated the Chief Operating Officer function.

     As a result of these actions and other actions taken in 2001, we made provisions for severance and related employee costs, facility closure costs and estimated losses on abandoned facilities totaling $9.7 million and $14.3 million in 2002 and 2001, respectively. None of these charges were recorded in the first quarters of 2002 or 2003. The remaining liability at March 31, 2003 is approximately $10.7 million, of which, $7.5 million is long-term and is expected to be paid through 2009. Should additional cost reduction actions be required in the future or if management’s estimates of the losses on the current abandoned facility leases are inadequate, future provisions could be required.

     Our current plans are to improve our execution by focusing on our core product offerings and the markets where we have traditionally been most successful, retail and third-party logistics customers. We expect our newest products such as our adaptive inventory management solution (EXceed AIM) and our visibility and business process management solution, Supply Network Execution (EXceed SNx), will provide the opportunity

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for growth and an ability to differentiate us from our competitors. Additionally, we will consider opportunities to better utilize partner channels in Asia and Europe that will expand our ability to reach international markets while lowering our cost of operating in these markets.

     We are hopeful that our lower cost structure, combined with improved sales, will position us to return to profitability. We made significant progress in lowering our cost structure in the first quarter of 2003. Cost of services and maintenance, sales and marketing, research and development and general and administrative expenses declined approximately $2.6 million, or 13.7%, compared to the fourth quarter of 2002. We are also continuing to focus on improving our gross margin for services and maintenance. The gross margin was 35% in the first quarter of 2003 compared to 27% in the fourth quarter of 2002. We will continue to review and evaluate our cost structure in the future in light of the existing business environment. Further cost reduction actions will be taken, should business volumes not improve.

     Approximately 25.2% of our revenues were from our Asia Pacific region during the first quarter of 2003, where the Severe Acute Respiratory Syndrome (SARS) outbreak has occurred. Although we are hopeful that our business will not be significantly impacted by the uncertainty caused by the SARS outbreak, revenues could be negatively impacted until this illness is controlled.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and the results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make judgments regarding estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not apparent from other sources. Although management evaluates these judgments on an ongoing basis, there can be no assurance that actual results will not ultimately differ from those estimates. For a more detailed explanation of these judgments, including our judgments relating to revenue recognition, allowance for doubtful accounts and adjustments, goodwill and intangible impairment, accruals for lease abandonment and employee termination costs, related party transactions, and contingencies you may refer to our Annual Report on Form 10-K for the year ended December 31, 2002.

Results of Operations

Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31, 2002

Revenue

     Total Revenue. Total revenue declined $4.2 million, or 21.5%, to $15.4 million for the three months ended March 31, 2003, from $19.6 million for the three months ended March 31, 2002. International revenue accounted for 52.8% of total revenue during the three months ended March 31, 2003 and 2002. No single customer accounted for more than 10.0% of total revenue during the three months ended March 31, 2003 or 2002.

     Software License. Software license revenue of $2.7 million was $1.4 million, or 35.4%, lower than the $4.1 million recorded during the three months ended March 31, 2002. Software license revenue as a percentage of total revenue excluding reimbursable expenses was 17.9% for the three months ended March 31, 2003 versus 21.7% for the three months ended March 31, 2002. The lower software license revenue primarily occurred in North America and Japan.

     Services and Maintenance. Services and maintenance revenue declined $0.9 million, or 7.2%, to $11.0 million for the three months ended March 31, 2003 from $11.9 million for the three months ended March 31, 2002. Services and maintenance revenue as a percentage of total revenue excluding reimbursable expenses

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increased to 73.5% for the three months ended March 31, 2003 from 62.1% for the three months ended March 31, 2002. The lower license revenue over the last several quarters has impacted services and maintenance revenues, since there have been fewer software implementation projects. As a result, revenue from consulting services has declined.

     Resale Software and Equipment. Resale software and equipment revenue declined $1.8 million, or 58.1%, to $1.3 million for the three months ended March 31, 2003, from $3.1 million for the three months ended March 31, 2002. Resale software and equipment as a percentage of total revenue excluding reimbursable expenses was 8.7% for the three months ended March 31, 2003 versus 16.2% for the three months ended March 31, 2002. We delivered a large amount of hardware to a customer in Germany in the first quarter of 2002. Also, early in the first quarter of 2003, we delivered approximately $0.5 million of hardware to a customer who declared bankruptcy in April 2003. As a result, we did not recognize this revenue from the resale equipment sale and provided an estimated loss for the cost of the equipment. Resale software and equipment revenue decreased $3.3 million or 71.7% when compared with the preceding three months ended December 31, 2002. This decrease is attributed to a decline in resale revenues from our North American region and the exclusion of the revenue associated with the resale equipment sold to a customer that subsequently filed for bankruptcy.

Costs and Expenses

     Cost of Software Licenses. Cost of software licenses consists primarily of royalties associated with software used to develop our software products, the cost of reproduction, and the cost of complementary software applications that we purchase to sell to our customers. Cost of software licenses represented 11.2% of software license revenue for the three months ended March 31, 2003 and 2.7% for the three months ended March 31, 2002. The increase in cost of software licenses as a percentage of software license revenue was attributed to an increase in purchasing of complementary software that was sold during the three months ended March 31, 2003.

     Cost of Services and Maintenance. Cost of services and maintenance consists primarily of salaries of professional staff and costs associated with implementation, consulting and training services, hotline telephone support, new releases of software and updating user documentation. As a percentage of services and maintenance revenue, cost of services and maintenance was approximately 64.6% for the three months ended March 31, 2003 compared to 68.9% for the three months ended March 31, 2002. Cost of services and maintenance were lowered by 13.1%, or $1.1 million, to $7.1 million for the three months ended March 31, 2003, from $8.2 million for the three months ended March 31, 2002. We were able to improve utilization of our staff and, as a result, we reduced the number of full time services and maintenance employees by 30.1%.

     Cost of Resale Software and Equipment. Cost of resale software and equipment consists primarily of the costs of the database software tools and hardware we purchase to resell to our customers. Cost of resale software and equipment decreased $1.2 million, or 44.2%, to $1.4 million for the three months ended March 31, 2003, from $2.6 million for the three months ended March 31, 2002. As a percentage of resale software and equipment revenue, cost of resale software and equipment was 75.4% for the three months ended March 31, 2003, and 83.0% for the three months ended March 31, 2002. This improvement was due to the sale of higher margin database software during the first quarter of 2003.

     Estimated Loss on Resale Equipment Sold to Company in Bankruptcy. We sold approximately $0.5 million of resale equipment early in the current quarter to a customer who subsequently filed bankruptcy in April 2003. As a result, we did not recognize the revenue from the equipment sale and provided $0.5 million loss for the cost of the equipment.

     Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, bonuses, recruiting costs, travel, marketing materials and trade shows. Sales and marketing expenses declined $1.1 million, or 22.4%, to $3.9 million for the three months ended March 31, 2003, from $5.1 million for the three months ended March 31, 2002. The decline was related primarily to a 25.1% reduction in the number of

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sales and marketing employees, lower commission expenses for sales staff and partners as a result of lower software license revenues and lower marketing expense. As a percentage of total revenue excluding reimbursable expenses, sales and marketing expenses were unchanged at 26.2% for the three months ended March 31, 2003, and 26.5% for the three months ended March 31, 2002.

     Research and Development. Research and development expenses consist primarily of salaries and other personnel-related costs for our product development activities. Research and development expenses declined $0.5 million, or 16.1%, to $2.6 million for the three months ended March 31, 2003, from $3.1 million for the three months ended March 31, 2002. As a percentage of total revenue excluding reimbursable expenses, research and development expenses increased to 17.1% for the three months ended March 31, 2003, from 16.0% for the three months ended March 31, 2002. As a part of our cost reduction program, in late 2002 we signed a three-year agreement with a company to provide offshore development resources in India at a cost that will be lower than our historic development costs.

     General and Administrative. General and administrative expenses consist primarily of salaries and other personnel-related costs of our finance, human resources, information systems, administrative, legal and executive departments, insurance costs and the costs associated with legal, accounting, and other administrative services. General and administrative costs declined $0.5 million, or 14.3%, to $2.7 million for the three months ended March 31, 2003, from $3.2 million for the three months ended March 31, 2002. This decline was due primarily to a 24.4% reduction in the number of general and administrative employees and contractors. Additionally, reduced depreciation expense caused by property and equipment write-offs associated with the facility closure actions during the prior year contributed to the decline in general and administrative expenses in the current quarter. As a percentage of total revenue excluding reimbursable expenses, general and administrative expenses increased to 18.2% for the three months ended March 31, 2003, from 16.6% for the three months ended March 31, 2002.

     Amortization of Intangible Assets. Amortization of intangible assets relates primarily to acquired developed software technology and assets acquired in connection with the 1997 acquisition of Dallas Systems. Amortization of intangible assets decreased $0.1 million to $0.2 million for the three months ended March 31, 2003, from $0.3 million for the three months ended March 31, 2002, and has decreased from $0.4 million for the three months ended December 31, 2002. The decline from the prior year is attributed to intangible assets acquired in the 1997 acquisition of Dallas Systems that were fully amortized in the final quarter of the prior year. In November of 2001 and July of 2002, we acquired a total of $2.0 million of developed software technology that has resulted in $0.2 million in amortization during the three months ended March 31, 2003.

     Non-Cash Warrant and Stock Compensation. Non-cash warrant and stock compensation expense relates to the amortization of deferred compensation recorded primarily in connection with stock options granted to employees. The deferred compensation recorded represented the difference between the exercise price and the deemed fair value of our common stock on the date of grant of these options. Non-cash warrant and stock compensation expense decreased $0.1 million to $0.2 million for the three months ended March 31, 2003, from $0.3 million for the three months ended March 31, 2002, and $0.3 million for the three months ended December 31, 2002.

     Other Income (Expense). Other income (expense) consists of gains and losses from currency fluctuations, interest expense, and interest income on investments. The increase in other income from the first quarter of 2003 compared to the first quarter of 2002 of $0.2 million was due primarily to higher foreign exchange gains. Although we periodically buy forward contracts to hedge against certain foreign currency fluctuations, we may have foreign currency gains and losses that can significantly vary from quarter to quarter.

     Income Taxes. An income tax provision of $0.2 million was recognized during the three months ended March 31, 2003. The income tax provision was primarily due to foreign withholding taxes and taxes on income earned by foreign subsidiaries.

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Liquidity and Capital Resources

     We have funded our operations through the issuance of our preferred and common stock, bank borrowings and cash flow from operations. As of March 31, 2003 we had approximately $33.1 million in cash and marketable securities, a decline of approximately $4.3 million from the end of 2002.

     Net cash used by operating activities was approximately $4.1 million for the three months ended March 31, 2003. The net loss before non-cash adjustments (depreciation and amortization, provision for losses on receivables, amortization of deferred compensation, and minority interest) was approximately $2.0 million, and operating assets and liabilities consumed approximately $2.1 million of cash. Although we generated approximately $4.3 million by lowering our receivable days from 80 days in the fourth quarter of 2002 to 72 days in the first quarter of 2003, we used approximately $7.6 million of cash from the reduction of accounts payable and accrued liabilities. The reduction of accounts payable was primarily due to payments to resale software and equipment vendors related to resale equipment deliveries that were made in the fourth quarter of 2002. The reduction of accrued liabilities was due primarily to payments for employee severance and lease payments on our abandoned Dallas facility related to cost reduction actions taken during 2002. Deferred revenues increased by approximately $1.3 million. Net cash used in operating activities was approximately $1.5 million for the comparable three months ended March 31, 2002.

     We used approximately $0.1 million for capital expenditures and approximately $0.1 million for scheduled debt payments. A similar amount of cash was used for capital expenditures in the first quarter of 2002. Net cash provided by financing activities was $0.2 million for the three months ended March 31, 2002. We expect that capital expenditures will not exceed $1.0 million for the next 12 months.

     In October 2002, the Company entered into a revolving line of credit agreement with a financial institution under which the Company can borrow up to $10.0 million over a two-year period. The agreement contains certain financial covenants, including a minimum $10.0 million cash and marketable securities balance, restrictions on dividends and the facility is secured with all of the Company’s tangible assets. Borrowings for half of the revolving credit line will be based on a defined borrowing base, while the balance does not contain this restriction. Interest on any borrowings will be at the prime rate, and the Company will pay a fee on the unused portion of the line of credit of 0.375% per annum. There were no borrowings under this agreement during the first quarter of 2003.

     We currently have operating lease obligations of approximately $41.5 million. Approximately $38.0 million of the total lease obligations relate to our Dallas facility lease for approximately 195,000 square feet, which expires in 2015. Currently, we occupy less than 50% of the space and we are attempting to sublease the unoccupied leased space. Provisions have been made for estimated losses on certain leases that are abandoned (see Note 8 of the Notes to the Consolidated Financial Statements included elsewhere herein), but cash payments will be required for the remainder of the existing lease obligations. If we are able to reach a settlement with the lessors of our abandoned Dallas facility on terms favorable to the Company within the next twelve months, additional settlement payments might be required which could be considerably higher than the scheduled operating lease payments during that period.

     Although we expect to continue to use some cash over the next six months due to operating losses, severance and facility related costs associated with the cost reduction actions taken during 2002, we believe that our existing working capital and the availability of cash under the new revolving credit line will be sufficient to fund our operations for at least the next year. However, there can be no assurance that we will not require additional financing in the future. We cannot be sure that we will be able to obtain any additional required financing or that, if we can, the terms will be acceptable to us.

     We do not engage in any activities involving special purpose entities or off-balance sheet financing.

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Special Note Regarding Forward-Looking Statements

     In addition to historical information, this filing and our Annual Report on Form 10-K contain forward-looking statements. Any statements contained herein (including, without limitation, statements to the effect that EXE or its management “believes,” “expects,” “anticipates,” “plans,” “estimates,” “predicts,” “seeks,” “intends” and similar expressions) that relate to future events or conditions should be considered forward-looking statements. The forward-looking statements are made pursuant to safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to; those discussed in the section entitled “Certain Factors That May Affect Future Results” below and in subsequently and previously filed reports. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligations to revise or publicly release the results of any revision to these forward-looking statements, whether as a result of new information, future events or otherwise.

Certain Factors That May Affect Future Results

Risks Relating to Our Business

Our customers may continue to delay or cancel spending on software and services because of the current economic climate.

     Since the beginning of 2001, some companies have experienced financial difficulties or uncertainty and, as a result, have delayed or canceled spending on information technology projects such as fulfillment software and services. If companies continue to delay, or cancel, their information technology initiatives because of the current economic climate, or for other reasons, our business, financial condition and results of operations could be materially adversely affected.

We can give you no assurance that we will be able to maintain or grow our level of revenue or achieve profitability in the future.

     Our future operating results may be affected by any of the following factors:

•		a continued decline in general economic conditions;
•		the level of market acceptance of, and demand for, our software;
•		the overall growth rate of the markets in which we compete;
•		our competitors’ products and prices;
•		our ability to establish strategic marketing relationships;
•		our ability to develop and market new and enhanced products;
•		our ability to successfully train alliance companies and consulting organizations;
•		our ability to control costs;
•		changes in our products and services mix; and
•		our ability to train and expand our direct sales force and indirect distribution channels worldwide.

We may not be profitable in the future.

     With the exception of the third and fourth quarters of the year ended December 31, 2000, we have experienced quarterly and annual losses since the formation of EXE in September 1997. We experienced net losses of $63.9 million in 2001, $23.8 million in 2002 and $3.2 million for the three months ended March 31, 2003. We may continue to incur losses on both a quarterly and an annual basis. Moreover, we expect to

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continue to incur significant sales and marketing, research and development and general and administrative expenses and, as a result, we will need to generate significant revenue to report net income in future periods. We may not achieve our planned growth or generate sufficient revenue to report net income in future periods.

Our revenue could decline if our customers do not continue to accept our existing products, including fulfillment and collaboration products.

     We expect to derive a majority of our product license revenue in the future from our fulfillment and collaboration products and their components. Our business depends on continued customer acceptance of these products and the release, introduction and customer acceptance of new products. We expect that we will continue to depend on revenue from new and enhanced versions of our fulfillment and collaboration products, and our revenue could decline if our target customers do not continue to adopt and expand their use of these products and their components.

Our quarterly operating results depend heavily on software license revenue, which is difficult to forecast and may fluctuate.

     Our quarterly software license revenue is difficult to forecast because our sales cycles, from initial evaluation to delivery of software, vary substantially from customer to customer. Revenue in any quarter is dependent on orders received, contracts signed and products shipped in that quarter. We typically recognize the majority of our revenue in the last month of the quarter, frequently in the last week or even days of the quarter. In addition, the timing of large individual license sales is difficult for us to predict, and, in some cases, transactions are concluded later than anticipated. Since our operating expenses are based on anticipated revenue levels and most of our operating expenses, particularly personnel and facilities costs, are relatively fixed in advance of any particular quarter, any revenue shortfall may cause fluctuations in operating results in any particular quarter. We can give you no assurance that revenue will grow in future periods, that revenue will grow at historical rates, or that we will achieve and maintain positive operating margins in future quarters. If revenue falls below our expectations in a particular quarter, our operating results could be harmed.

Because our sales cycles are lengthy and subject to uncertainties, it is difficult to forecast our sales, and the delay or failure of a significant software license transaction or our inability to anticipate a delay could harm our operating results.

     Our software is used for mission critical division- or enterprise-wide purposes and involves a significant commitment of resources by customers. A customer’s decision to license our software usually involves the evaluation of the available alternatives by a number of personnel in multiple functional and geographic areas, each often having specific and conflicting requirements. Accordingly, we typically must expend substantial resources educating prospective customers about the value of our solutions. For these and other reasons, the length of time between the date of initial contact with the potential customer and the execution of a software license agreement typically ranges from three to nine months, and is subject to delays over which we may have little or no control. As a result of the length and variability of the sales cycle for our software products, our ability to forecast the timing and amount of specific sales is limited, and the delay or failure to complete one or more anticipated large license transactions could harm our operating results.

We depend on the services of a number of key personnel, some of whom have recently joined us. A failure to integrate these personnel into the Company or a loss of any of these personnel could disrupt our operations and result in reduced revenue.

     Our success depends on the continued services and performance of our senior management staff. The loss of the services of any of our senior management staff or key employees could seriously impair our ability to operate and achieve our objectives, which could reduce our revenue. We have employment agreements with all of our executive officers. However, these employment agreements do not prevent key employees, from voluntarily terminating their employment with us.

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     Joseph L. Cowan, our President and Chief Executive Officer, and Kenneth R. Vines, our Senior Vice President, Chief Financial Officer, Secretary and Treasurer, joined us in November 2002 and May 2002, respectively. Additionally, Mark Weaser, President, Asian Operations has been an employee of the Company for several years. The failure to integrate Mr. Cowan or Mr. Vines into the Company or with the senior management team, or the departure of one of the executives could disrupt our operations and harm our business and financial results.

Failure to expand our alliance relationships with consulting firms and complementary software vendors and to establish new strategic alliances may slow acceptance of our software and delay the growth of our revenue.

     To supplement our direct sales force and our implementation capabilities, we have established strategic marketing alliances with consulting firms and complementary software vendors, and we rely on them to recommend our software to their customers and to periodically install and support our software. To increase our sales and implementation capabilities, one of our key strategies is to expand our existing relationships and establish new strategic alliances with consulting firms and complementary software vendors. The loss of, or failure to expand, existing relationships or our failure to establish new strategic alliances could limit the number of transactions we may complete, may result in our inability to recognize revenue and may harm our operating results.

If our new or enhanced products do not gain market acceptance, our business and results of operations would be harmed.

     The growth of our business will depend on the successful development, introduction and acceptance of new and enhanced versions of our products. The introduction of new or enhanced products requires that we manage the transition from existing products to these new or enhanced products. We have recently introduced our EXceed AIM and EXceed SNx software solutions to work in conjunction with our existing fulfillment software suite in order to extend our product reach into complementary markets. We expect to derive a portion of our revenues in the future from new and enhanced products currently being developed, including Exceed AIM and Exceed SNx. If EXceed AIM and EXceed SNx and our other new and enhanced products do not gain market acceptance, our revenues may decline. Factors that may affect the market acceptance of EXceed AIM and EXceed SNx and our other new and enhanced products, some of which are beyond our control, may include:

•		the changing requirements of our industry;
•		the performance, quality and price of our new and enhanced products; and
•		the availability, performance, quality and price of competing products and technologies.

We may experience delays in the scheduled introduction of new or upgraded software, and our software may contain undetected errors or “bugs,” resulting in loss of revenue and harm to our reputation.

     Historically, we have issued significant new software products or new releases of our software periodically, with interim releases issued more frequently. Our software is particularly complex, because it must perform in environments operating multiple computer systems and respond to customer demand for high performance fulfillment, warehousing and distribution applications and major new product enhancements. Our software requires long development and testing periods before it is commercially released. For example, the development cycle for the introduction of our EXceed Crossdock component took approximately nine months. If we experience delays in the scheduled introduction of new software or software upgrades, our customers may become dissatisfied and our reputation and operating results could be harmed.

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     Also, despite testing by us, our software may contain undetected errors or “bugs.” In the past, we have discovered software bugs in new versions of our software after its release. We may experience software bugs in the future. These bugs could result in a delay or loss of revenue, diversion of development resources, damage to our reputation, increased service and warranty costs, or impaired market acceptance and sales of this software, any of which could harm our operating results.

If we are unable to timely collect our accounts receivable, our cash flow will be harmed.

     Although we have recently improved on the time required to collect accounts receivable from our customers, there is no assurance that this trend will continue. Historically, we have experienced longer receivable collection periods that have largely been attributed to the deterioration of certain of our customers’ financial condition due to the negative economic climate in the United States and the international markets we serve. The failure of any significant customer to pay for our products on a timely basis could adversely affect our results of operations and our operating cash flow.

If we do not expand our customer base, our business may not grow.

     Our growth is dependent in part on our ability to attract new customers for our products. We derive a substantial portion of our revenue from the sale of additional products and services to our existing customers. If we are unable to expand our customer base by attracting new customers for our products, our business will suffer. In addition, a material reduction in the demand for our products and services from our existing customers would have a material adverse effect on our business, financial condition and results of operations.

Our international operations are subject to heightened risks. If any of these risks actually occur, our earnings could decline.

     International revenue accounted for approximately 52.8% of our total revenue during the three months ended March 31, 2003, 52.2% of our total revenue during the year ended December 31, 2002, and 46.6% of our total revenue during the year ended December 31, 2001.

     Our international operations are subject to risks inherent in international business activities, including:

•		difficulty in staffing and managing geographically diverse operations;
•		longer accounts receivable payment cycles in certain countries;
•		compliance with a variety of foreign laws and regulations;
•		unexpected changes in regulatory requirements and overlap of different tax structures;
•		greater difficulty in safeguarding intellectual property;
•		trade restrictions;
•		changes in tariff rates and import and export licensing requirements; and
•		general economic conditions in international markets.

     In addition, we have expanded our offshore research and development activities. In the instance of a political upheaval in certain regions, our development process could be severely disrupted. Our operating results could be negatively impacted if these or other factors affect international operations.

     Approximately 25.2% of our revenues were from our Asia Pacific region during the first quarter of 2003, where the Severe Acute Respiratory Syndrome (SARS) outbreak has occurred. Although we are hopeful that our business will not be significantly impacted by the uncertainty caused by the SARS outbreak, revenues could be negatively impacted until this illness is controlled.

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Because many of our customers pay us in foreign currencies, we may be exposed to exchange rate risks and our profitability may suffer due to currency fluctuations.

     A majority of the revenue and expenses incurred by our international operations are denominated in currencies other than the United States dollar. In particular, our revenue and costs of operations in Japan and Singapore are denominated in Japanese Yen and Singapore Dollars and in Europe some of our contracts are denominated in the Euro. Exchange rate fluctuations have caused and will continue to cause currency transaction gains and losses. We experienced currency transaction gains (losses) of $0.3 million for the three months ended March 31, 2003, $1.2 million for the year ended December 31, 2002, and $(0.5) million for the year ended December 31, 2001. We can give you no assurance that currency transaction losses will not adversely affect our results in future periods.

Our success depends on our ability to attract and retain key personnel, in particular knowledgeable and experienced sales and marketing personnel and professional services personnel. If we are unable to attract these personnel and use them efficiently, our ability to sell and implement our software could be harmed.

     We believe our success will depend significantly on our ability to attract, motivate and retain highly skilled technical, managerial, consulting, sales and marketing personnel and professional services personnel. We compete intensely for these personnel, and we may be unable to achieve our personnel goals. Our failure to attract, motivate and retain such highly skilled personnel could seriously limit our ability to expand our business.

     Our operating performance, personnel reductions and lower stock price over the last two years has made it difficult to retain key personnel. There is no assurance we will be able to retain our key personnel in the future.

     Also, we believe our success will depend on our ability to productively manage our personnel. Any significant growth in software license revenue will likely generate the need for more professional services personnel to deploy and implement software and to train customers. A shortage in the number of trained personnel, either within our Company or available from outside consulting firms, could limit our ability to implement our software on a timely and cost-effective basis. Our operating performance will suffer if we generate insufficient revenue to cover growth-related expenses, significantly strain management resources with additional responsibilities, fail to successfully expand our relationships and develop additional relationships with third-party implementers and complementary software vendors or fail to have sufficiently trained sales and marketing personnel and professional services personnel.

The length and complexity of our implementation cycle may result in implementation delays, which may cause customer dissatisfaction.

     The introduction of new products and the size and complexity of some of our software implementations can result in lengthy implementation cycles and may result in delays. These delays could result in customer dissatisfaction, which could adversely affect our reputation. Additional delays could result if we fail to attract, train and retain services personnel, or if our alliance companies fail to commit sufficient resources towards implementing our software. These delays and resulting customer dissatisfaction could harm our reputation and cause our revenue to decline.

The use of fixed-price service contracts subjects us to the risk that we may not successfully complete these contracts on budget.

     We offer software implementation and related consulting services to our customers. Although we typically provide services on a “time and material” basis, we have from time to time entered into fixed-price service contracts, and we expect that some customers will demand these contracts in the future. These contracts specify certain milestones to be met by us regardless of actual costs incurred in meeting those obligations. If we are unable to successfully complete these contracts on budget, our earnings could suffer.

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We rely on software licenses that may be terminated or unavailable to us on commercially reasonable terms.

     We market and resell, under license, third party software, including:

•		software embedded in our products;
•		software that enables our software to interact with other software systems or databases; and
•		software in conjunction with which our software operates.

     We also license software tools used to develop our software and software for internal systems. We cannot assure you that the third party software or software tools will continue to be available to us on commercially reasonable terms. The loss or inability to maintain any of these software licenses could result in delays or reductions in product shipments until equivalent software could be identified and licensed or compiled, which could harm our business.

We could be subject to legal actions by former personnel, which could be costly, divert management time and attention and harm our operating results.

     During 2001 and 2002, we terminated approximately 343 of our services, sales, development and administrative personnel. It is possible that some of these employees could bring legal actions against us under applicable federal, state or local laws. Any such claims, whether with or without merit, could subject us to costly litigation and the diversion of management time and attention, and successful claims could result in awards of damages to or reinstatement of former employees, any of which could harm our operating results.

Our non-cancelable, long-term lease of office space in Dallas, Texas is substantially in excess of our expected facility requirements resulting in significant future cash obligations for unused office space, which could negatively impact our financial condition in the future.

     We lease approximately 195,000 square feet of office space in Dallas, Texas under a lease that extends to 2015. Amounts due the landlord over the remaining term of the lease are in excess of $38.0 million. Currently, we occupy less than 50% of the office space. Approximately half of the office space has been abandoned and a reserve for the estimated loss has been provided in the Consolidated Financial Statements. Although we have attempted to renegotiate the lease terms, the landlord has been unwilling to modify the lease or reduce the lease cost. We have also been unable to sublease the excess office space. As a result, we will be required to continue to make significant lease payments in the future for the unused space.

Product liability and other claims related to our customers’ business operations could result in substantial costs.

     Many of our installations involve projects that are critical to the operations of our clients’ businesses and provide benefits that may be difficult to quantify. Any failure in a client’s system or any intellectual property infringement claims by third parties could result in a claim for substantial damages against us, regardless of our responsibility for the failure or for the alleged intellectual property infringement. We cannot assure you that our customer contracts will protect us in the event of any such claim. In addition, although we maintain general liability insurance coverage, including coverage for errors or omissions, we cannot assure you that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage.

     The successful assertion of one or more large claims against us that exceeds available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could result in substantial costs.

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     Five customers have requested defense and indemnification from us for threatened patent claims against them by a third party relating to bar code technology. For additional information about these requests, see “Item 1. Business — Intellectual Property” of our Annual Report on Form 10-K for the year ended December 31, 2002.

Should our stock price fall below $1 per share for a period of time our common stock could be de-listed from the NASDAQ National market.

     During the last half of 2002 our common stock price was subject to de-listing on the NASDAQ National Market due to our stock price being below $1 per share for a specified period of time. Our shareholders approved a one for seven reverse stock split which was effective in January 2003. As a result of the reverse stock split, our stock price increased substantially above $1 per share. Should our stock price fall below $1 per share again, we could be subject to de-listing again.

     If our common stock is de-listed by NASDAQ and our securities begin to trade on the OTC Bulletin Board maintained by NASDAQ, another over-the-counter quotation system, or on the pink sheets, investors may find it more difficult to dispose of or obtain accurate quotations as to the market value of the securities. In addition, we would be subject to a rule promulgated by the Securities and Exchange Commission that, if we fail to meet criteria set forth in such rule, imposes various practice requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transactions prior to sale. Consequently, the rule may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. De-listing from NASDAQ will make trading our shares more difficult for investors, potentially leading to further declines in our share price. It would also make it more difficult for us to raise additional capital. Further, if we are de-listed we could also incur additional costs under state blue-sky laws in connection with any sales of our securities.

     Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the low share price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if the share price were higher. This factor may also limit the willingness of institutions to purchase our common stock.

We expect our results of operations to fluctuate, and the price of our common stock could fall if quarterly results differ from the expectations of securities analysts.

     Our operating results historically have fluctuated on a quarterly basis and may continue to do so in the future. If our quarterly results differ from the expectations of securities analysts, the price of our common stock could fall. Some of the factors that could cause our operating results to fluctuate include:

•		general economic conditions;
•		demand for our products and services;
•		our competitors’ products and prices;
•		the timing and market acceptance of new product introductions and upgrades by us or our competitors;
•		our success in expanding our services, customer support and marketing and sales organizations, and the timing of these activities;
•		the mix of products and services sold;
•		delays in, or cancellations of, customer implementations;
•		customers’ budget constraints;
•		the level of research and development expenditures;
•		the size of recurring compensation charges;
•		changes in foreign currency exchange rates;

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•		our ability to control costs; and
•		the timing of acquisitions and of the amortization or impairment of intangible assets.

     A large portion of our expenses, including expenses for facilities, equipment and personnel, is relatively fixed. Accordingly, if our revenue declines or does not grow as anticipated, we may not be able to correspondingly reduce our operating expenses in a timely manner. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular fiscal period.

Our stock price could be extremely volatile and may result in litigation against us.

     The stock market has experienced significant price and volume fluctuations, and the market price for our common stock has been in the past and could continue to be volatile. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. Litigation could result in substantial costs and a diversion of management’s attention and resources.

The concentration of ownership of our common stock may have the effect of delaying or preventing a change of control of us.

     Our directors, executive officers and their affiliated companies beneficially own more than 40% of our outstanding common stock. As a result, these stockholders will have the ability to significantly influence the election of our directors and the outcome of corporate actions requiring stockholder approval. This concentration of ownership may have the effect of delaying or preventing a change of control of us. As a result, if these stockholders voted as a group, they would have the ability to significantly influence the outcome of corporate actions requiring stockholder approval.

We have implemented anti-takeover provisions that may discourage a change of control.

     Our certificate of incorporation authorizes the issuance of 20,000,000 shares of preferred stock. Our board of directors has the power to determine the price and terms of any preferred stock. The ability of our board of directors to issue one or more series of preferred stock without stockholder approval could deter or delay unsolicited changes of control by discouraging open market purchases of our common stock or a non-negotiated tender or exchange offer for our common stock. Discouraging open market purchases may be disadvantageous to our stockholders who may otherwise desire to participate in a transaction in which they would receive a premium for their shares.

     In addition, some provisions of our certificate of incorporation and by-laws may also discourage a change of control by means of a tender offer, open market purchase, proxy contest or otherwise. These provisions include:

•		a board that is divided into three classes, each of which is elected to serve staggered three year terms;
•		provisions under which only the board of directors or our chief executive officer or secretary may call a special meeting of the stockholders;
•		provisions which permit the board of directors to increase the number of directors and to fill these positions without a vote of the stockholders;
•		provisions under which no director may be removed at any time except for cause and by a majority vote of the outstanding shares of voting stock; and
•		provisions under which stockholder action may be taken only at a stockholders meeting and not by written consent of the stockholders.

     These provisions may have the effect of discouraging takeovers and encouraging persons seeking to acquire control first to negotiate with us.

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Risks Relating to Our Industry

We face intense competition from numerous competitors, some of whom have a significant competitive advantage over us. If we lose our competitive position, our revenue could decline.

     The market for fulfillment, collaboration and inventory management solutions is intensely competitive, fragmented and subject to rapid technological change. The principal competitive factors in our market include:

•		adherence to emerging Internet-based technology standards;
•		comprehensiveness of applications;
•		adaptability and flexibility;
•		immediate, interactive capability with customer and partner systems;
•		financial viability;
•		global capability;
•		references from existing customers;
•		industry domain experience and expertise;
•		ability to support specific industry requirements;
•		ease of application use and deployment;
•		speed of implementation;
•		customer service and support; and
•		initial price and total cost of ownership.

     Because we offer fulfillment, traditional supply chain, collaboration, inventory management and supply network execution software, we consider a number of companies in different market categories to be our competitors. Our competitors include companies and groups that:

•		focus on providing fulfillment applications;
•		offer enterprise platforms for order management, fulfillment and inventory management; and
•		service internal customers, such as internal information technology groups.

     We believe that the market for integrated fulfillment, collaboration, inventory management and supply network execution solutions is still in its formative stage, and that no currently identified competitor represents a dominant presence in this market.

     We expect competition to increase as a result of software industry consolidation. New competitors could emerge and rapidly capture market share. We can give you no assurance that we can maintain our competitive position against current and potential competitors, especially those with greater name recognition, comparable or superior products, significant installed customer bases, long-standing customer relationships or the ability to price products as incremental add-ons to existing systems. If we lose our competitive position, our revenue could decline.

The market for our software is characterized by rapid technological change. If we fail to respond promptly and effectively to technological change and competitors’ innovations, our growth and operating results could be harmed.

     The market for fulfillment, warehousing, distribution, inventory management and supply network execution systems experiences rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. Our growth and future operating results will depend in part on our ability to enhance existing applications and develop and introduce new applications or components. These new applications must:

•

meet or exceed technological advances in the marketplace;

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•		meet changing customer requirements;
•		respond to competitive products; and
•		achieve market acceptance.

     Our product development and testing efforts have required, and are expected to continue to require, substantial investments. Also, we may be unable to successfully identify new software opportunities and develop and bring new software to market quickly and efficiently. Our software may not achieve market acceptance and current or future products may not conform to industry standards in the markets served. If we are unable to develop and introduce new and enhanced software in a timely manner, our growth and operating results could be harmed.

We depend on intellectual property laws, which may not fully protect us from unauthorized use or misappropriation of our proprietary technologies.

     We rely on intellectual property laws, confidentiality procedures and contractual provisions to protect our proprietary rights in our products and technology. These measures afford only limited protection to us, particularly on an international basis. We may be unable to avoid infringement or misappropriation claims regarding current or future technology, or unable to adequately deter misappropriation or independent third-party development of our technology. In addition, policing unauthorized use of our products is difficult.

     We are unable to determine the extent to which piracy of our software products exists and software piracy could become a problem. Litigation to defend and enforce our intellectual property rights could result in substantial costs and diversion of resources, regardless of the final outcome of such litigation.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We market and sell our products in North America, South America, Europe, the Middle East, Asia and Australia. Revenues outside the United States were 46.6%, 52.2% and 52.8% of our total revenues for the years ended December 31, 2001 and 2002, and for the three months ended March 31, 2003, respectively. Most of our foreign subsidiaries’ sales and expenses are made in local currencies. International sales denominated in currencies other than the U.S. dollar are primarily in the Japanese Yen, Singapore dollar and the Euro. Accordingly, we are exposed to fluctuations in currency exchange rates. Foreign currency transaction gains (losses) were approximately $(0.5) million, $1.2 million and $0.3 million for the years ended December 31, 2001 and 2002, and for the three months ended March 31, 2003, respectively. Because most of our sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets.

     Our net assets denominated in currencies other than U.S. dollars as of March 31, 2003 were approximately $7.7 million. A potential loss in the value of these net assets resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $0.8 million.

     In January 2001, we began a foreign currency-hedging program to hedge certain nonfunctional currency exposure. Forward currency exchange contracts are utilized by us to reduce foreign currency exchange risks with the goal of offsetting foreign currency transaction gains and losses recorded for accounting purposes with gains and losses realized on the forward contracts. We do not hold derivative financial instruments for trading or speculative purposes.

     As of March 31, 2003, the Company had an outstanding forward currency exchange contract of $3.0 million to sell Japanese Yen that hedges certain foreign currency exposures. Gains and losses arising from the changes in the fair value of forward currency exchange contracts are recognized as a component of other income (expense). At March 31, 2003, the current market settlement values of the forward contracts would result in a loss of approximately $0.1 million.

     We used a portion of the proceeds obtained from our August 2000 initial public offering to repay all outstanding amounts under our revolving credit facility and term loan, which we subsequently terminated. To the extent that we enter into a new credit facility in the future, future interest expense could be subject to fluctuations based on the general level of U.S. interest rates.

ITEM 4. CONTROLS AND PROCEDURES

     Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic SEC filings is recorded, processed and reported within the time periods specified in the SEC’s rules and forms. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

     There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Use of Proceeds

     (d)  The Company completed its initial public offering of 1,142,857 million shares of its common stock pursuant to a Registration Statement on Form S-1 (Registration No. 333-35106, effective August 3, 2000) on August 9, 2000. Total proceeds from the offering, including the exercise of the over-allotment option, were approximately $63.9 million net of underwriting discounts and commissions of approximately $5.0 million and other fees and expenses of approximately $1.8 million.

     From the date of receipt through March 31, 2003, we have used the proceeds as follows:

     The remainder of the proceeds has been invested in investment grade corporate and government securities and money market funds. We intend to use the remaining proceeds for research and development activities; expenditures on sales and marketing, consulting services, and general and administrative personnel; systems costs; and working capital and general corporate purposes, including possible acquisitions of, or investments in, businesses and technologies that are complementary to our business. None of the net proceeds of the offering were paid by us, directly or indirectly, to any director, officer or general partner of ours or any of their associates, or to any persons owning ten percent or more of any class of our equity securities, or any affiliates of ours.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     The Company filed a Form 8-K on January 2, 2003 reporting Item 5 with respect to its press release announcing that its board of directors has formally declared a one for seven reverse stock split of the Company’s common stock effective January 2, 2003.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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CERTIFICATIONS

I, Joseph L. Cowan, Chief Executive Officer of the registrant certify that:

1.		I have reviewed this quarterly report on Form 10-Q of the registrant.
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the registrant and have:

	a.		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b.		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: May 15, 2003

/s/ Joseph L. Cowan

Chief Executive Officer

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CERTIFICATIONS

I, Kenneth R. Vines, Chief Financial Officer of the registrant certify that:

1.		I have reviewed this quarterly report on Form 10-Q of the registrant.
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the registrant and have:

	a.		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b.		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: May 15, 2003

/s/ Kenneth R. Vines

Chief Financial Officer

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Table of Contents

INDEX TO EXHIBITS

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