NEXPRISE INC - 10-K Annual Report

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. þ

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. þ

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

At June 30, 2003, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $9,134,000.

At March 01, 2004, the number of shares of Common Stock outstanding was 3,237,718.

NexPrise, Inc. (the “Company”, “NexPrise”, “us”, “our” or “we”), is a seller of business process automation and management applications. We develop and market software solutions that can enable manufacturers to rapidly automate key business processes. These solutions complement and expand on currently installed enterprise systems and accommodate ongoing process improvements as companies require to meet their changing business demands. In 2002 we acquired privately-held InfoPrise, Inc. (“InfoPrise”) and combined its data management technology with our existing collaborative solutions infrastructure to produce the business process automation applications and development platform that are now our primary product offerings.

The Company originally was incorporated as Chemdex Corporation in September 1997 in Delaware. In February 2000, we changed our name to Ventro Corporation and in January 2002, we renamed the company NexPrise, Inc. to reflect the focus on the solutions and customers acquired in August 2001. Our principal offices are located at 5950 La Place Court, Suite 2000, Carlsbad, California, 92008. Our telephone number is (760) 804-1333. Investors may access our filings with the Securities and Exchange Commission on our website, which is located on the Internet at www.nexprise.com. The information on our website does not constitute part of this Annual Report.

For 2004, our focus is to further develop our product offering, to increase our customer base and revenue and to move our operations closer to generating positive cash flow.

We target large-to-medium size organizations, primarily in North America. Our installed base of customers represents numerous industries. The aerospace and defense and automotive industries are particularly well represented. During 2003, approximately 19% of our revenues were from Trelleborg-YSH, Inc, approximately 16% were from Sikorsky Aircraft Corporation, approximately 13% were from entities of The Boeing Company and approximately 12% were from entities of Textron Corporation. During 2002, approximately 17% of our revenues were from three entities of The Boeing Company, approximately 13% were from Sikorsky Aircraft Corporation, approximately 12% were from Trelleborg-YSH, Inc. and approximately 10% were from Decoma International, Inc. The Company maintains allowances for potential credit losses and, historically, those losses have been within management’s expectations.

NexPrise’s backlog was approximately $2.7 million at December 31, 2003. Backlog includes only orders for which delivery will occur within 12 months and for which revenue has not been recognized. In addition, backlog includes service revenue and maintenance fees to be earned within the next 12 months. However, customers may delay delivery of products or cancel orders suddenly and without notice, subject to possible cancellation penalties. Due to these possible changes, NexPrise’s backlog at any particular date is not necessarily indicative of actual revenue for any succeeding period.

Our current marketing, sales, and support activities relate to building NexPrise’s brand identity, determining product direction, building our customer base, and managing and serving customer accounts. In 2003 we sold our product through a direct sales force distributed in various strategic locations. Technical Account Managers were responsible for pre-sales technical support and also the successful deployment of our product at the customer site. Expenses for technical support and customer service are included in cost of revenues. In 2004 we plan to augment the direct sales model with an indirect model, whereby process templates will be available for customers to download and configure and then deploy in our hosted environment. It is our belief that this indirect model will prove to be an efficient and scalable delivery mechanism and, over time, we expect indirect sales to contribute significantly to the Company’s growth and profitability.

Our research and development organization is focused on developing and enhancing our product for customers. As of March 01, 2004, our research and development organization included 20 employees responsible for software and system development. Expenses for research and development were $2.6 million in 2003. Research and development expenses in 2002 and 2001 were $5.3 million and $24.6 million, respectively. In addition, we incurred $399,000 of acquired in-process research and development related to the acquisition of InfoPrise in 2002 and $2.3 million of acquired in-process research and development related to the acquisition of NexPrise in 2001. To date, substantially all software development costs have been expensed as incurred because the time from working model to saleable model is very short. We believe that continued investments in research and development are required to remain competitive.

NexPrise’s product grew out of work that began in 1993. The product originally was developed as software technology to share sensitive documents securely over the Internet. In 1997, NexPrise was formed as a private company with intellectual property rights to this technology. We continued to develop the product and it evolved into the Program Manager and Quote System applications deployed in most of our installed base. In June 2002, we announced the release of the nProcess Platform and a set of configurable process applications that offer improved workflow, efficient integration into multiple data sources, rapid configuration and reconfiguration and a development studio that customers can use to automate their processes. Our software can be accessed by approved users with standard Internet browsers and can reside on either servers maintained and administered by our customers or servers hosted by us, though our hosting is generally outsourced to a third party.

Our principal applications are Document Manager, Engineering Change Manager, Supplier Non-Conformance and Corrective Action Manager, Cost Estimation and Quote Manager, Contract Data Manager, Supplier Materials Manager, Action Item Manager and Management of Change. All NexPrise applications are collaborative business process software solutions that allow individuals within and between companies to work efficiently together. All applications have functionality for:


	•	Intelligent workflow and forms

	•	Role-based views

	•	Secure internal/external collaboration

	•	Powerful, flexible reporting

	•	Simple, efficient integration

The nProcess Platform enables any number of process applications to be built rapidly, inexpensively and without writing code. The graphical workflow module, the ability to tailor access to data to the specific requirements of each participant in the process and the ability to create and map data objects enable our process experts to develop and configure business process automation applications that precisely fit customer processes, as well as to change those applications quickly and inexpensively as customers evolve their processes. We also license the nProcess Platform to customers who prefer to do their own development and modifications.


	•	Infrastructure Layer. This layer is the foundation of the product and provides the product with Internet access, email and database functionality and security. The layer is implemented using standard web servers and supports standard Internet protocols such as HTTP/ HTTPS and XML.

	•	Application Layer. This layer provides specific functionality and workflow for business applications such as Engineering Change Manager and Supplier Non-Conformance and Corrective Action Manager.

The markets for business process automation and collaborative solutions are new and evolving rapidly. Competition is intense and is expected to increase significantly in the future. Barriers to entry are not substantial. We believe that the critical success factors for companies seeking to create these solutions include the following:


	•	Quality, reliability and security of the solution

	•	Breadth and depth of product offerings

	•	Ability of solution to embrace and extend installed legacy applications

	•	Ability of solution to be efficiently configured and rapidly deployed

	•	Brand recognition

	•	Installed base of customers

	•	Ease of use

We face competition from a diverse group of companies, including companies with Product Data Management (PDM) offerings such as MatrixOne or Parametric Technology Corporation (PTC). These companies have extended their PDM offerings to develop solutions that are competitive. Competition could also come from developers of enterprise software solutions such as i2 Technologies, Oracle, or Ariba, which may expand their product lines to compete. Competition could further come from enterprise application integration software providers, such as Vitria, BEA, and IBM. We believe we have a product that is superior to competitors’ offerings and that we can compete effectively with these companies. However, these companies have larger sales and marketing organizations and will be formidable competitors.

In September 2003, the Company sold its interest in Ingenuity Systems for $1 million in cash to parties unaffiliated with NexPrise. The transaction resulted in a net gain on investment of approximately $287,000 for the year ended December 31, 2003.

Our success and ability to compete depends on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of copyright, trademark and trade secret laws and contractual restrictions to establish and protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. We have filed three U.S. patent applications and one foreign application on our proprietary technology. The three U.S. patents have been issued. The one foreign application is currently pending. We own three trademark registrations in the United States, four trademark registrations in foreign jurisdictions, and one Community Trademark Application.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Any resulting litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business operating results.

Our business involves the licensing of our technology to our customers. Pursuant to our existing licenses, we have made certain representations and warranties and agreed to indemnify our licensees against claims of infringement by third parties. Thus, we may be exposed to a significant risk of liability for intellectual property infringement claims by others. Our success and ability to compete also depend on our ability to operate without infringing upon the proprietary rights of others. In the event of a successful claim of infringement

As of March 01, 2004, we had 33 full-time employees, including 20 in research and development, 8 in sales and marketing and support and 5 in general and administrative functions. We also employ from time to time a limited number of independent contractors to support our development and administrative organizations.

Set forth below is information regarding the directors and executive officers of NexPrise as of March 01, 2004.

Ted Drysdale has served as our President, Chief Executive Officer and Chairman of the Board of Directors since November 2001. Mr. Drysdale has served on our Board of Directors since October 2001. Prior to joining NexPrise, Mr. Drysdale was President and Chief Executive Officer of privately held NexPrise, Inc., a manufacturing software company, which we acquired in August 2001. From January 1999 to April 2000, Mr. Drysdale was Senior Vice President of the Visualization and CSM Group of Parametric Technology Corporation, a manufacturing software company. From September 1998 to January 1999, Mr. Drysdale served as President and Chief Executive Officer of Division, Inc., a manufacturing software company, and from April 1996 to September 1998, he served as Chief Executive Officer and Co-Founder of Objectlogic, a developer of visualization and markup software.

Jerome E. Natoli has served as our Chief Financial Officer since March 2002. Mr. Natoli joined the Company as the Chemdex Director of Finance in March 2000 and was appointed Vice-President of Finance in March 2001. From October 1998 to March 2000 he was Controller of Hewlett-Packard’s E-Commerce division. Between July 1989 and October 1998 he held various positions in Hewlett-Packard’s finance organization in the U.S. and overseas. Mr. Natoli holds a B.A. in Economics from the University of California, Berkeley, and an M.B.A. from the University of Chicago.

Raj Tolani was the President and Chief Executive Officer of InfoPrise, which was acquired by the Company in February 2002. Mr. Tolani has been in the software development industry for the past 17 years and is the former founder, Chairman and President of ObjectLogic. He led the development and growth of ObjectLogic, as well as its merger with Division Ltd and stayed on as Vice-President of Development after its acquisition. During his tenure with Division Ltd., he lead development teams in both the U.S. and U.K. Prior to that, as Vice-President of development for Computer Vision. Mr. Tolani holds a Bachelor’s Degree in Mechanical Engineering from the Indian Institute of Technology and a Master’s Degree in Mechanical Engineering from the University of Rhode Island.

John Lynch was appointed Senior Vice President of Sales & Services in August 2001. From July 2000 to August 2001 Mr. Lynch served as Senior Vice President of Sales at NexPrise, Inc. Prior to joining NexPrise, Mr. Lynch served from January 1999 to June 2000 as Area Vice President at Parametric Technology Corporation, where he was responsible for global account sales of web-based enterprise business-to-business collaboration software technology, document management, vaulting, and consulting services. Previous to PTC, Mr. Lynch served from May 1996 to December 1998 as Vice President Sales for Division Inc, where he was responsible for North American sales of web-based enterprise visualization tools to Fortune 1000 companies. Prior to Division, Mr. Lynch served as Vice President, Sales for the eastern region at Objectlogic, a developer of visualization and markup software. He holds a Bachelor of Science degree in Economics from the University of Southern California.

Our executive, sales and development offices are located in approximately 10,107 square feet in Carlsbad, California under a lease expiring in December 2006. Administrative offices are located in Palo Alto, California, and occupy approximately 1,200 square feet with a month to month rental obligation. At December 31, 2003, the Company maintains four small sales offices with short term lease obligations in a number of domestic locations.

Starting in March 2001, several lawsuits were filed in United States District Court for the Northern District of California against the Company and certain of its officers and directors on behalf of putative classes of persons who purchased the Company’s securities during time periods from December 1999 through December 6, 2000. One of the lawsuits also names as a defendant the underwriters for the Company’s offering of convertible notes. The lawsuits generally allege that the Company and certain individuals violated the federal securities laws by making false and misleading statements during 2000, including in the Company’s registration statement for its convertible notes offering. These lawsuits have been consolidated as In re Ventro Corp. Sec. Litigation, Master File No. Civ. 01-1287 SBA, and a consolidated complaint was filed. On July 30, 2002, the Company and other defendants named in the action filed motions to dismiss. On March 31, 2003, the Court granted in part and denied in part the motions to dismiss. The plaintiffs filed an amended complaint May 15, 2003. On July 14, 2003 the Company, the individual defendants and the underwriter defendants filed motions to dismiss certain allegations of the amended complaint. On October 14, 2003 the Court heard oral argument on the motions, and granted the motion of the Company and the individual defendants and granted in part and denied in part the motion of the underwriter defendants. Plaintiffs were given leave to amend their complaint. On November 26, 2003, plaintiffs filed an amended complaint. On December 19, 2003 the Company, the individual defendants and the underwriter defendants filed motions to dismiss new allegations added in the amended complaint. On January 23, 2004 the Court heard oral argument on the motions, and granted the motion of the Company, the individual defendants, and the underwriter defendants to dismiss the new allegations with prejudice. The Court has set a trial date for January 20, 2005 with respect to the remaining issues. No discovery has taken place. The Company believes that the claims are without merit and intends to defend the case vigorously.

In August 2001, Chadwell v Byers, Case No. CV800814, a putative stockholder derivative suit, was filed in California Superior Court, Santa Clara County against certain of the Company’s present and former officers and directors, alleging breaches of fiduciary duty and insider trading. The Company is named solely as a nominal defendant against which no recovery is sought. After a demurrer was sustained with leave to amend, the parties stipulated to a stay of proceedings pending resolution of the In re Ventro Corp. Sec. Litigation Federal consolidated action.

In March 2001, Kassin v. Ventro Corp. et al., Index No. 01-CV-3450 (SAS), a stockholder class action complaint, was filed in the United States District Court for the Southern District of New York against the Company, several of its officers and directors, and the underwriters of its initial public offering. The class action has been consolidated for pre-trial purposes with more than one thousand other actions, filed against more than 300 other issuers of securities, affiliated individuals and dozens of underwriters of the securities offerings in In Re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (“IPO Allocation Litigation”). The plaintiffs allege that the prospectus for the initial public offering of the Company’s common stock, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose, among other things, that the underwriters had made secret arrangements for aftermarket purchases of the securities and made arrangements for excessive and improper underwriters’ compensation in the form of increased brokerage commissions. Plaintiffs are claiming damages of an unspecified amount based on the subsequent decline in the market price of the Company’s shares below their original offering price. In recent months in the IPO Allocation Litigation, counsel for the plaintiffs, liaison counsel for the issuer defendants and counsel for insurers of the issuer defendants have taken part in continuing discussions mediated by a former federal district court judge to explore a possible settlement of the claims against all of the issuer defendants, including the Company. In June 2003, a memorandum of understanding was entered into by and among the plaintiffs, liaison counsel for the issuer defendants and counsel for the insurers which would result in dismissal of the action against the

issuers, including the Company, on terms that would not require any current payment by the Company and are believed by the Company’s board of directors to carry only a remote risk that any future payment by the Company would be required. In addition, the plaintiffs would release the Company and its officers and directors from the claims that have been asserted against them in the IPO Allocation Litigation as a part of the proposed settlement. On June 30, 2003, the Company’s board of directors approved the memorandum of understanding and authorized the Company to enter into the proposed settlement. The memorandum of understanding and proposed settlement are expected to be submitted to the Court for its required approval shortly. The IPO Allocation Litigation in general, and the litigation against the Company in particular, are in an early phase, and no date has yet been set by the court for completion of pre-trial discovery or trial.

The Company is a party to various claims in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Our common stock traded under the symbol “NXPS” on the Nasdaq National Market until April 25, 2003 and then phased down to the Nasdaq SmallCap Market using the same symbol. Effective December 5, 2003, our common stock transitioned to the OTC Bulletin Board under the symbol “NXPS.OB”. The Company previously utilized the trading symbol “CMDX” from July 27, 1999 until February 28, 2000 and “VNTR” from March 1, 2000 until January 14, 2002. Prior to July 27, 1999, there was no public market for our common stock. In April 2002, the Company effected a reverse split of its common stock. As a result of the reverse stock split, every 15 issued and outstanding shares of the Company’s old common stock were converted into one share of new common stock.

The following table shows the high and low sale prices of the Company’s common stock as reported by Nasdaq and the OTC Bulletin Board. The quotations furnished by the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The historical price per share data has been adjusted to reflect the reverse stock split.

On March 1, 2004 there were approximately 376 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (or DTC). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede and Co. as one stockholder.

We have not declared or paid any cash dividends on our capital stock since our inception and do not expect to pay any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business.

The selected financial data below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included in this document. The following balance sheet data as of December 31, 2003 and 2002 and the selected consolidated statements of operations data for years ended December 31, 2003, 2002 and 2001 have been derived from audited consolidated financial statements included elsewhere in this document. The consolidated balance sheet data as of December 31, 2001, 2000, and 1999 and the consolidated statements of operation data for the years ended December 31, 2000 and 1999 have been derived from audited consolidated statements not included in this document. The selected consolidated statement of operations data has been restated to reflect the Chemdex and Promedix businesses as discontinued operations. Historical results are not necessarily indicative of results that may be expected for future periods. See Note 2 of Notes to our Consolidated Financial Statements for an explanation of how shares used in computing basic and diluted net loss per share were determined.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those stated herein. Although management of NexPrise believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, performance, or achievements. For further information, refer to the Risk Factors section of this Form 10-K.

We are a seller of business process automation and management applications and collaborative solutions for program management and quote management. Our revenue primarily consists of subscriptions of bundled license, post contract support (PCS) and, in most cases, hosting services.

In January 2002, we changed our name to NexPrise, Inc. On February 4, 2002, we acquired privately-held InfoPrise, located in Carlsbad, California, and combined its data management technology with our existing collaborative solutions infrastructure to produce the business process automation applications and development platform that are now our primary product offerings. All operating results presented for periods following the above date are derived from the combined operations of NexPrise and InfoPrise.

Our key objectives for 2003 were to increase revenue and backlog while conserving cash. In 2003, revenue increased 25% over 2002, to $3.5 million, while backlog increased 42% to $2.7 million. Cash used in operations decreased to $5.3 million from $14.8 million in 2002. Although these results have some merit, particularly in light of the 2003 economic climate, they did not put the Company on a path where achieving cash flow break-even utilizing existing assets was assured. Therefore, in January 2004, the Company eliminated several positions, primarily in the sales and marketing functions, to reduce operating expenses. At the same time, our product development team is focusing on enhancing our solutions so they can be more easily configured by customers and indirect channel partners, will require less involvement by our technical personnel and can be delivered efficiently via the Internet. It will take several quarters before the business flowing through this indirect channel has a significant impact on operating results, but the reduced variable cost per incremental revenue dollar is expected to significantly improve our operating margin and allow our business to scale more readily. Management believes that its restructuring activities have reduced the Company’s ongoing operating

Use of Estimates. Management’s discussion and analysis of its financial condition and 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 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 estimates on historical experience and on various other assumptions 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 readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements

Revenue Recognition. For all arrangements, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. Our revenue recognition policy is in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended, Staff Accounting Bulletin 101 and EITF 00-21, Revenue Arrangements with Multiple Deliverables.

Term license revenue includes bundled term licenses, post contract support and, in most cases, hosting services. The Company recognizes such revenue using the “subscription” method, whereby the initial and renewal amounts are recognized ratably over the period of the license during which the services are expected to be provided. In instances where maintenance is bundled with licenses of software products, such maintenance terms are typically one year.

Perpetual license revenue is recognized using the residual method described in SOP No. 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element (for example, undelivered maintenance and support, training and consulting). The determination of fair value is based upon vendor specific objective evidence (“VSOE”). VSOE of the fair value of maintenance for license agreements with and without stated renewal rates is based on the Company’s price list. VSOE of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by the Company’s customers when maintenance is sold separately. Past history has shown that the rate the Company charges for maintenance on license agreements with a stated renewal rate is similar to the rate the Company charges for maintenance on license agreements without a stated renewal rate. Revenue for training or consulting is based upon separate sales of these services. When software services are considered essential or the arrangement involves significant customization or modification of the software, both the net license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on input measures of hours, or completed contract method. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue.

NexPrise did not establish VSOE for maintenance prior to March 31, 2003, and therefore recognized the revenue from license agreements entered into prior to March 31, 2003 ratably over the maintenance period. NexPrise established VSOE in the three months ended June 30, 2003. The Company must maintain VSOE on maintenance for perpetual licenses or risks an end to recognition of perpetual license revenue using the residual method.

Revenue for training or consulting services is recognized based upon contract completion or on a time and materials basis.

Long Lived Assets. The Company reviews the carrying value of property, plant and equipment and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value.

No indicators of impairment were found in the first, second or third quarters of 2003. In the fourth quarter of 2003 a reduction in our revenue forecast and a reduction in the estimated useful lives of the intangible assets due to our fourth quarter decision to adopt a plan to transition toward an indirect channel solution led us to conclude there were indicators the intangible assets were impaired. The resulting analysis of discounted cash flows led to an impairment charge of approximately $6.4 million, leaving approximately $139,000 of intangible assets to be amortized evenly over their revised remaining estimated useful lives, which is through the end of 2004.

During 2004 we will continue to evaluate our intangible assets for impairment as events and circumstances warrant. Among other circumstances, a material deterioration in the future cash flows expected from these assets due to lower than planned revenue or a decline in the Company’s market capitalization could be indicators of impairment and lead to write-offs.

Legal. The Company is involved in certain claims and litigation related to its operations, including ordinary, routine litigation incidental to its business. Management reviews and determines which liabilities, if any, arising from these claims and litigation could have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. In reviewing these claims and litigation, management assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accruals required, if any, for these contingencies is made after analysis of each matter, which includes discussion with counsel retained in such matter. The required accruals may change in the future due to new developments in a matter or changes in strategies to resolve that matter, including changes in litigation defense and settlement strategies. The Company had no accruals for legal contingencies at December 31, 2003.

The following table sets forth items from our consolidated statement of operations (in thousands):

Revenues. NexPrise reported approximately $3.5 million of revenue for the year ended December 31, 2003, an increase of approximately 25% from the $2.8 million of revenue reported for the year ended December 31, 2002. This revenue is made up primarily of subscriptions and services, perpetual licenses and maintenance for the Company’s business process automation and collaborative commerce products. The growth in 2003 was driven by approximately $500,000 of net incremental revenue from existing customers and approximately $240,000 of revenue from customers newly contracted in 2003. The revenue in 2001 reflects sales generated subsequent to our August 8, 2001 acquisition of privately-held NexPrise, Inc. Approximately 7% of the reported revenue for the twelve months ended December 31, 2003 consisted of perpetual license revenue that was recognized when the software was delivered. Approximately 7% of the revenue recognized for the twelve months ended December 31, 2003 consisted of consulting and training. The remaining 86% of revenue recognized for the twelve months ended December 31, 2003 consisted of revenue being recognized ratably over the contract term and is made up of bundled subscriptions and perpetual licenses with maintenance sold prior to the establishment of VSOE for maintenance.

Cost of Product Licenses and Services. Cost of product licenses and services was approximately 32.6% of revenue in 2003, a decrease of approximately 21 percentage points compared with the 53.5% in 2002. Cost of product licenses and services was approximately 23.9% in 2001. Cost of product licenses and services consists primarily of outsourced hosting services for our customers, personnel and other expenses associated with providing maintenance services, configuration services, technical support services and royalties payable to third parties whose software is incorporated in our solution. The decrease in cost of product licenses and services as a percent of revenue in 2003 as compared with 2002 was driven by lower hosting, maintenance and technical support services costs realized when the Company changed its hosting environment in the second half of 2002. The increase in cost of product licenses and services as a percentage of revenue in 2002 as compared with 2001

Cost of Purchased Technology and Write Down of Intangible Assets. Amortization of the purchased technology intangible assets acquired in the purchases of NexPrise in August, 2001 and InfoPrise in February, 2002 was approximately $2 million in 2003, $895,000 in 2002 and $548,000 in 2001. Purchased technology has been amortized based on forecast revenue and was scheduled to be fully amortized in 2005. In accordance with our policy for assessing the carrying value of our long lived assets, in each quarter of 2003 we compared the carrying value of the intangible assets with the undiscounted cash flows expected to be generated by those assets over their remaining estimated useful lives. No indicators of impairment were found in the first, second or third quarters of 2003. In the fourth quarter of 2003 a reduction in our revenue forecast and a reduction in the estimated useful lives of the intangible assets due to a decision in the fourth quarter to adopt a plan to transition toward an indirect channel solution led us to conclude there were indicators the intangible assets were impaired. The resulting analysis of discounted cash flows led to an impairment charge of approximately $6.4 million, leaving approximately $139,000 of intangible assets to be amortized evenly over their revised remaining estimated useful lives, which is through the end of 2004. Of that value, approximately $137,000 is purchased technology related to the acquisitions of NexPrise and InfoPrise and approximately $2,000 is for a non-compete agreement signed at the time of the NexPrise acquisition.

Research and Development. Research and development expenses consist primarily of personnel and other expenses associated with developing, updating, and enhancing software. Research and development expenses were approximately $2.6 million during 2003, down approximately $2.7 million from 2002. The decrease with respect to 2002 is primarily due to reduced depreciation and personnel expenses. Depreciation is lower because fewer assets are now deployed for research and development. The lower personnel costs result from reductions in force that occurred in the first half of 2002. Research and development expenses in 2002 decreased by approximately $21.9 million from 2001. The decrease in 2002 from 2001 is due to reductions in workforce that took place throughout 2001. To date, all software development costs have been expensed in the period incurred. The Company does not expect R&D expenses to change significantly in the coming year. We believe that continued investments in research and development are required to remain competitive.

In Process Research and Development. The Company expensed $399,000 and $2.3 million of acquired in-process research and development for the year ended December 31, 2002 and December 31, 2001, respectively. The in-process research and development expensed in 2002 was acquired as a result of the InfoPrise acquisition in February 2002. The in-process research and development expensed in 2001 was acquired as a result of the NexPrise acquisition in August 2001. The Company determined the amounts of in process research and development based on estimates and forecasts and independent valuations in connection with the allocation of purchase price.

Sales and Marketing. Sales and marketing expenses consist primarily of payroll and related expenses for personnel engaged in enterprise sales activities and enterprise account management, as well as travel and promotional expenses. Sales and marketing expenses were approximately $3.8 million during 2003, down approximately $1.6 million from 2002. Sales and marketing expenses in 2002 were approximately $5.5 million in 2002, down approximately $5.6 million from 2001. The decreases were driven by reductions in workforce that took place during 2002 and 2001 and reduced spending on marketing programs.

General and Administrative. General and administrative expenses consist primarily of salaries, fees for professional services and facilities expenses. General and administrative expenses were approximately $2.7 million in 2003, down approximately $2.4 million from 2002. General and administrative expenses were approximately $5.1 million in 2002, down approximately $9 million from 2001. The decreases were primarily due to reduced infrastructure costs, lower legal expenses and reductions in workforce made in the first and fourth quarters of 2002 and throughout 2001.

Settlements, Restructurings and Other. In 2003, the Company reversed a restructuring and settlement accrual related to the Company’s cancellation of a contract that was originally part of a restructuring in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activity had ceased and no actual charges had been, or are now expected to be, paid. The reversal resulted in a credit of $493,000 being reported on the restructuring line of the statement of operations. The Company did not report

any restructuring or settlement expenses in the year ended December 31, 2002. During the year ended December 31, 2001, the Company reported charges of approximately $16.5 million for several actions taken to improve efficiencies and reduce operating costs. The specific actions include employee and contractor terminations, consolidation of facilities, settlements of various disputes and termination of leases. The net of these charges was reported as a component of loss before extraordinary item and consisted of approximately $5.4 million of expense related to workforce reductions, approximately $7.2 million of expense related to terminating equipment and property leases and asset write-offs of approximately $11.6 million. These expenses were partially offset by an approximately $7.6 million net gain from settlements with our former marketplace companies.

Impairment of Goodwill. SFAS 142, Goodwill and Other Intangible Assets,requires that we evaluate on an annual basis (or whenever events occur which may indicate possible impairment) whether any portion of recorded goodwill is impaired. This analysis requires management to make a series of critical assumptions to: (1) evaluate whether any impairment exists, and (2) measure the amount of impairment. The Company performed the required transitional impairment test and annual impairment test of the goodwill acquired as part of its acquisition of NexPrise as of January 1, 2002 and September 30, 2002, respectively, and, in each case, did not identify an impairment of the goodwill balance. In the fourth quarter of 2002 our market capitalization decreased to a value at December 31, 2002 that was approximately $14 million less than our book value prior to any impairment charges. That decrease and a reduction in forecast revenues led us to conclude there were sufficient indicators to warrant an evaluation of whether any portion of our $11.7 million of recorded goodwill was impaired in the fourth quarter of 2002. The analysis resulted in an impairment charge equal to the entire $11.7 million balance in the fourth quarter of 2002. The remaining identified intangible assets were also tested for impairment at that time. No impairment was found, as the value of the undiscounted cash flows expected to be generated by these assets over their estimated lives as of December 31, 2002 exceeded their carrying value of $9.2 million. The results of the 2003 impairment tests for intangible assets is described in Cost of Purchased Technology and Write Down of Intangible Assetsabove.

Interest Expense. Interest expense in 2003 was approximately $756,000, up approximately $7,000 from 2002. Interest expense was approximately $749,000 in 2002, down approximately $4.9 million from 2001. Interest expense consists primarily of interest related to convertible subordinated notes issued in April 2000, the convertible promissory note issued in association with the purchase of InfoPrise in February 2002 and, to a lesser extent, financed equipment and other financing arrangements. With respect to the subordinated notes, approximately $265,000 is payable semi-annually in arrears on April 1 and October 1 of each year for interest on the notes that remain outstanding at December 31, 2003. In addition, the remaining deferred offering costs of approximately $152,000 related to the subordinated notes are being amortized as interest expense ratably over the term of the subordinated notes. With respect to the InfoPrise convertible promissory note, approximately $73,000 is payable annually on each anniversary of the issuance of the promissory note, with the balance of interest owed due at maturity. The decrease in interest expense in 2002 from 2001 was due primarily to the retirement of approximately 96% of the original balance of convertible subordinated notes during 2001.

Interest Income and Other, Net. Interest income and other, net, in 2003 was approximately $241,000, a decrease of approximately $25,000 from 2002. Interest income and other, net, in 2002 was approximately $216,000, a decrease of approximately $4.2 million from 2001. Interest income and other, net, has been derived primarily from earnings on investments in cash equivalents and short-term investments. The increase in 2003 is due to the reversal of estimated taxes associated with the gain from retirement of bonds in 2001. All tax returns have been filed and no liability was incurred. The decrease in interest income and other in 2003 and 2002 is primarily attributable to lower cash, cash equivalent and investment balances and a decline in interest rates.

Investment Gains and Losses. The 2002 gain on investment in strategic partners resulted from the sale of the Company’s shares of Amphire Solutions. The gain on other investment in 2003 reflects a $287,000 net gain from the Company’s sale of its interest in Ingenuity Systems. The losses on other investments in 2002 and 2001 reflect write-downs for impairment deemed to be other than temporary in investments accounted for using the cost method. The equity losses in 2002 and 2001 are our share of losses incurred by the marketplace companies in which we had a significant ownership percentage.

Gain from Retirement of Bonds, Net. During 2001, the Company repurchased approximately $241.2 million of convertible subordinated notes, which represented approximately 96.5% of the notes outstanding at December 2000. The total consideration provided by the Company for the tendered bonds, including accrued interest, transaction and other costs, was approximately $81.4 million. The Company recognized a gain of approximately $159.8 million on the transactions.

Loss from Continuing Operations. As a result of the changes described above, the loss from continuing operations was approximately $14.9 million in 2003, down approximately $14.6 million from 2002 and down approximately $64.5 million from 2001.

Discontinued Operations. In December 2000, the Company’s Board of Directors adopted a formal plan for and announced the shut down of all business operations associated with the Company’s life sciences and specialty medical products marketplaces. The shutdown of Chemdex, Promedix and SpecialtyMD was completed by March 31, 2001. In fiscal 2003, the Company paid $2,000 of liabilities related to discontinued operations and reversed an accrual of $334,000 related to an estimated liability accrued upon the Company’s cancellation of a contract that had been part of operations discontinued in 2000 and which ceased functioning in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activities ceased and no actual charges had, or are now expected to be, paid.

Revenues from discontinued operations were approximately $24.2 million for the year ended December 31, 2001. The Company paid approximately $9.8 million in 2001 for severance, lease obligations and other liabilities incurred to shut down Chemdex and Promedix. At December 31, 2003 there remained no accrued liabilities relating to discontinued operations.

As of December 31, 2003, NexPrise had approximately $6 million of cash, cash equivalents and short-term investments; working capital was approximately $4.0 million.

Net cash used in operating activities was approximately $5.3 million for the year ended December 31, 2003 compared to $14.8 million of net cash used in operating activities for the year ended December 31, 2002. Net cash used in operating activities for the year ended December 31, 2003 is primarily attributable to the net loss for the period (less non-cash expenses) and, to a lesser extent, an increase in deferred revenue and decreases in accounts payable, accrued compensation, accrued expenses and discontinued liabilities. Non cash items primarily consisted of a write-down of intangible assets which totaled $6.4 million, depreciation and amortization of $2.9 million and investment losses of $613,000. These cash flows used in operating activities were partially offset by decreases in other current assets and gains of approximately $400,000 from the sale of an investment. The actions taken in the past 12 months to reduce expenditures are expected to decrease the ongoing use of cash by operating activities to between $500,000 and $1.2 million per quarter in 2004.

Net cash provided by investing activities totaled $3.0 million for the year ended December 31, 2003, compared to net cash provided by investing activities of $4.5 million for the year ended December 31, 2002. During the year ended December 31, 2003, the Company had net sales and maturities of approximately $2.1 million of short-term investments and received cash of approximately $1.0 million as part of the sale of an investment.

Net cash provided in financing activities was $11,000 for the year ended December 31, 2003 compared to net cash used in financing activities of $112,000 for the year ended December 31, 2002. The Company received $11,000 from the issuance of stock options and employee stock purchase shares in the year ended December 31, 2003.

Management believes the Company has adequate cash to sustain operations at least through 2004 and is managing its business to achieve positive cash flow utilizing existing assets. Management’s key objectives for 2003 were to increase revenue and backlog while conserving cash. In 2003, revenue increased 25% over 2002 while backlog increased 42% to $2.7 million. Cash used in operations decreased to $5.3 million from $14.8 million in 2002. Although these results have merit, particularly in light of the 2003 economic climate, they did not put the Company on a path where achieving cash flow break-even utilizing existing assets was assured. To reduce operating expenses, the Company eliminated several positions, primarily in the sales and marketing functions, in January 2004. At the same time, our product development team is focusing on

enhancing our solutions so they can be more easily configured by customers and indirect channel partners, will require less involvement by our technical personnel and can be delivered efficiently via the Internet. It will take several quarters before the business flowing through this indirect channel has a significant impact on operating results, but the reduced variable cost per incremental revenue dollar is expected to significantly improve our operating margin and allow our business to scale more readily. Our plan is to achieve cash flow break-even in 2005 using this indirect channel, our continuing direct sales efforts and the aforementioned reduction in expenses.

As of December 31, 2003, the Company had working capital of approximately $4.0 million, including cash, cash equivalents and short-term investments of $6.0 million. At December 31, 2003, the Company had a stockholders’ deficit of approximately $7.3 million. During the year ended December 31, 2003, the Company used cash, cash equivalents and short term investments to fund operating activities of approximately $5.3 million and received cash proceeds of $1.0 million on the sale of an investment. During the fourth quarter of 2003, the Company used cash and cash equivalents in operating activities of approximately $1.7 million. Management believes that its restructuring activities have reduced its ongoing operating expenses such that the quarterly use of cash in 2004 will be between $500,000 and $1.2 million and the Company will have sufficient working capital to support planned activities through 2004 and beyond. Management is committed to the successful execution of our operating plan and will take further action as necessary to align our operations and reduce expenses.

The following table summarizes the company’s contractual obligations and commercial commitments as of December 31, 2003 (in thousands):

In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 has not had a significant impact on the Company’s results of operations or financial condition.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). Variable interest entities are often created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003) (FIN 46R) which replaces FIN 46. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, defines what these variable interest entities are and provides guidelines on identifying them and assessing an enterprise’s interests in a variable interest entity to decide whether to consolidate that entity. FIN 46R applies at different dates to different types of enterprises and entities, and special provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of FIN 46R. Generally, application of FIN 46R is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s consolidated financial statements.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following cautionary statements and elsewhere in this Annual Report on Form 10-K. If any of the following risks were to occur, our business, financial condition or results or operations would likely suffer. In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating NexPrise and its business because such factors may have significant impact on NexPrise’s business, operating results and financial condition.

An investment in our securities involves significant risks, including those described below. These risks relate to our ability to generate revenues and gain operating efficiencies, our history of losses, significant changes, our ability to hire and retain key personnel, our reliance on the hosted environment and technology provided by others, the need to respond to rapid technological change and legal claims against us.

Our actual results may differ materially from those expressed in any forward-looking statement as a result of certain factors, including but not limited to those set forth below and included in other portions of this document.

Our common stock is neither listed on any exchange nor quoted on Nasdaq but is reported on the OTC Bulletin Board. Accordingly, our shares are subject to the regulations regarding trading in “penny stocks,” which are those securities trading for less than $5.00 per share. The following is a list of the primary restrictions on the sale of penny stocks:


	•	Prior to the sale of penny stock by a broker-dealer to a new purchaser, the broker-dealer must determine whether the purchaser is suitable to invest in penny stocks. To make that determination, a broker-dealer must obtain, from a prospective investor, information regarding the purchaser’s financial condition and investment experience and objectives. Subsequently, the broker-dealer must deliver to the purchaser a written statement setting forth the basis of the suitability finding.

	•	A broker-dealer must obtain from the purchaser a written agreement to purchase the securities. This agreement must be obtained for every purchase until the purchaser becomes an “established customer.”

	•	The Securities Exchange Act of 1934 requires that prior to effecting any transaction in any penny stock, a broker-dealer must provide the purchaser with a “risk disclosure document” that contains, among other things, a description of the penny stock market and how it functions and the risks associated with such investment. These disclosure rules are applicable to both purchases and sales by investors.

	•	A dealer that sells penny stock must send to the purchaser, within ten days after the end of each calendar month, a written account statement including prescribed information relating to the security.

As a result of the foregoing, an investor’s ability to convert shares of our common stock into cash or to sell to a third party may be very limited. We can provide no assurance that our current market-makers will continue to make a market in our securities, or that any market for our securities will continue.

Our success is based on integrating and developing a viable technology and services offering and securing new customers. Our business model is not fully developed, not proven and depends upon our ability, among other things, to:


	•	develop and market technology and services solutions that achieve broad market acceptance by our customers;

	•	acquire and deploy a sufficient number of customers to achieve profitability;

	•	extend our technology to support a large range of customers with a variety of needs;

	•	acquire or license third party technologies that we require to deliver our technology and services;

	•	overcome publicity related to our public announcements of restructurings, litigation and the shutdown of our former marketplaces;

	•	overcome customer bias toward choosing larger, well capitalized vendors to provide their enterprises software solutions; and

	•	acquire customers operating in industries where we have limited experience and provide them quality technology and services.

We may not successfully address these risks. If we do successfully address these risks, additional risks related to factors that are outside our control may prevent us from realizing sufficient revenues or profit margins to reach or sustain profitability. For example, collaborative business process solutions may experience problems with users as a result of security and privacy concerns or general reticence about technology.

To date, we have derived a significant portion of our revenues from a small number of customers in two industries. Many of our customers do not have contracts that extend beyond one year. Critical to the success of the Company’s business plan will be the acquisition of new customers in other industries, increasing the number of users in our current customers and renewing current contracts. There can be no assurance that we will be successful in developing profitable relationships with new customers in new industries or that we will retain existing customers.

The sales cycle for the target customers for the software and services we offer tends to be lengthy and may be somewhat longer than those of our more established competitors. The unpredictability of the length of our sales cycle could make it difficult to forecast revenue and plan expenditures. Additionally, any delays in deployment of our software related to our inexperience with a type of business or the size or complexity of the account would delay our ability to recognize revenue from that account. Such delays could adversely affect our financial results.

In order to comply with the newly adopted Sarbanes-Oxley Act of 2002 and proposed accounting changes and to implement other corporate governance practices that are now expected of publicly-traded companies, we may be required to hire additional personnel and will utilize additional outside legal, accounting and advisory services, all of which would cause our general and administrative costs to increase beyond what we currently have planned. Insurers may also increase premiums for liability coverage as a result of the high

claims rates incurred in past years, and so our premiums for our various insurance policies, including our directors’ and officers’ insurance policies, may increase. Proposed changes to accounting rules, including proposals to account for employee stock options as a compensation expense, could, if mandated, materially increase the expenses we report under generally accepted accounting principles and adversely affect our operating results.

Our services include the storage and transmission of business-critical, proprietary information. If the security measures we or our third party data centers have implemented are breached, our customers could lose this information, or a party who circumvents these security measures could misappropriate business-critical proprietary information or cause interruptions in our services or operations. As a result, we could be exposed to litigation and possible liability to our customers. In addition, computer “hackers” could introduce computer viruses into our systems or those of our customers, which could disrupt our services or make them inaccessible to customers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. Our security measures and those that our third-party data centers provide may be inadequate to prevent security breaches, and our business and reputation will suffer if these breaches occur.

We expect to sell a greater proportion of perpetual software licenses and fewer subscriptions to term licenses in coming quarters. In order to recognize revenue for perpetual software licenses in the period in which the license is delivered a number of criteria must be met, including the establishment of vendor specific objective evidence (VSOE) for the prices of the elements of the arrangement. If NexPrise is unable to meet these criteria, revenue for arrangements that include a perpetual license will be recognized ratably over the term of the contract and, therefore, revenue growth in the period in which the licenses are sold will be less than it would have been had the criteria been met.

We established VSOE for maintenance in the second quarter of 2003 and began recognizing perpetual license revenue upon delivery of the license. If we are unable to continuously meet the criteria required to maintain VSOE on maintenance, we may not be able to recognize perpetual license revenue using the residual method.

Despite testing by us, our partners and our customers, errors may be found in our products after commencement of commercial delivery. Errors have arisen in our software products from time to time, and they could arise again in the future. If errors are discovered, we may not be able to successfully correct them in a timely manner or at all. Errors and failures in our products could result in loss of or delay in market acceptance of our products and damage to our reputation and our ability to convince commercial users of the benefits of our products. In addition, we may need to make significant expenditures of capital resources in order to eliminate errors and failures. Since our products are used by customers for mission-critical applications, errors, defects or other performance problems could also result in financial or other damages to our customers, which could assert warranty and other claims for substantial damages against us. Although our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that such provisions may not be effective or enforceable under the laws of certain jurisdictions. In addition, our insurance policies may not adequately limit our exposure with respect to such claims. A product liability claim, even if unsuccessful, would be costly and time-consuming to defend and could harm our business.

Important factors that could cause our quarterly results to fluctuate materially include:


	•	our lengthy sales cycle and the resulting unpredictability of the timing of obtaining new customers;

	•	the timing of deploying services for new customers;

	•	whether our customers purchase perpetual licenses or subscriptions;

	•	the timing and magnitude of operating expenses and capital expenditures;

	•	costs associated with the various third-party technologies we incorporate into our products;

	•	utilization of third party data center services and technology infrastructure;

	•	changes in our pricing policies or those of our competitors; and

	•	the amount of credits that we may be required to issue to our current customers if we fail to deliver our services pursuant to contractual arrangements.

Due to these and other factors, quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for any one quarter as an indication of our future performance. In future quarters, our operating results may fall below the expectations of public market analysts or investors. If this occurs, the market price of our common stock would likely decline.

Our current and future levels of operating expenses and capital expenditures are based largely on our operating plans and estimates of future billings and revenues. These expenditure levels are, to a large extent, fixed in the short term. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenue relative to planned expenditures could negatively impact our business and results of operations.

Substantially all of our revenues to date have been derived from the sale of licenses and services associated with the ipTeam™ and nProcess solutions. Our future operating results will depend on continued demand for ipTeam and the nProcess Platform. ipTeam was commercially launched in 1998 and nProcess was launched in June 2002. If our competitors release new products that are superior to ipTeam or nProcess Platform in performance or price, or if we fail to enhance ipTeam and nProcess Platform in a timely manner, demand for our products may decline, and we may have to reduce the pricing of our products. A decline in demand or pricing as a result of these or other factors would significantly reduce the revenues we can expect in the future.

In the past, many software companies have experienced delays in the commencement of commercial release of their products. To date, such delays have not had a material impact on NexPrise’s revenues. In the future, we may fail to introduce or deliver new products on a timely basis. If new releases or products are delayed or do not achieve market acceptance, we could experience customer dissatisfaction or a delay or loss of revenues. In addition, customers may delay purchases of our products in anticipation of future releases. If customers defer material orders in anticipation of new releases or new product introductions, our revenues may decline.

Moreover, as we release enhanced versions of our products, we may not be successful in upgrading our customers who purchased previous versions of the product to the current version. We also may not be successful in selling add-on modules for our products to existing customers. Any failure to continue to upgrade existing customers’ products or sell new modules, if and when they are introduced, could negatively impact customer satisfaction and our revenues.

As with most software companies, developing and selling a product that does not require significant customization in product features or sales process for any particular customer or set of customers is critical to

We have incurred substantial net losses in the past and we expect to incur net losses in future periods. We incurred a net loss of approximately $14.5 million during the twelve months ended December 31, 2003. As of December 31, 2003 we had an accumulated deficit of approximately $639 million. We will need to generate significant increases in revenues to achieve and maintain profitability, and we may not be able to do so. If our revenues grow more slowly than we anticipate or if our operating expenses cannot be reduced in the event of lower than expected revenues, we may find it necessary to obtain additional equity or debt financing or, in the alternative, significantly curtail our operations. Such financing may not be available on acceptable terms or at all. Even if we achieve profitability in the future on a quarterly or annual basis, we may not be able to sustain or increase profitability. Failure to achieve profitability or achieve and sustain the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.

Our target market is rapidly evolving and is highly competitive. It may be characterized by an increasing number of market entrants, as many companies may find a technological path around existing barriers to entry.

We already have competition from a diverse group of companies, including companies such as MatrixOne and PTC. In addition, providers of various software products such as Oracle, IBM, PeopleSoft and SAP may expand their product offerings to be competitive with us in the future.

Our current and potential competitors may develop superior platforms that achieve greater market acceptance than our solution. Many of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Such competitors can undertake more extensive marketing campaigns for their brands, products and services, adopt more aggressive pricing policies and make more attractive offers to customers, potential employees, distribution partners, commerce companies and third-party suppliers.

In addition, substantially all of our prospective customers have established and long-standing relationships with some of our current or potential competitors. Accordingly, we cannot be certain that we will be able to expand NexPrise’s customer and user base, or retain its current customers. We may not be able to compete successfully against our current or future competitors, which could have a material adverse effect on our business, results of operations and financial condition.

We rely on third-party providers for our data center services, principal Internet connections and data hosting. This hosted environment is critical to the provision of our software to many of our customers and if the environment does not work well, is cut-off or fails, our customers would be unable to use our solution. We have experienced and may continue to experience interruptions and delays in service and availability for such services. We have signed an agreement with a new vendor to provide the hosted environment, but there can be no assurance that the new provider will provide service to the full satisfaction of our customers. Furthermore, we rely on these third party providers to respond promptly to requests we make for changes to our hardware, networking and telecommunications configuration in order to deliver our products and services to our customers. Any failures, security breaches, interruptions, or delays experienced or caused by these third party providers could negatively impact our relationship with users and adversely affect our brand and our business and could expose us to liabilities to third parties.

Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event at our company or any third party provider. Our operations and theirs are susceptible to

outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. In addition, the majority of our network infrastructure is located in California, an area susceptible to earthquakes. In the recent past, the western United States (and California, in particular) has experienced repeated episodes of diminished electrical power supply. As a result of these episodes, certain of our and their operations or facilities may be subject to “rolling blackouts” or other unscheduled interruptions of electrical power. The prospect of such unscheduled interruptions may continue for the foreseeable future, and we are unable to predict their occurrence, duration or cessation. We do not have, and our third party providers may not have, multiple site capacity for all of our services in the event of any such occurrence. Despite implementation of network security measures, the servers are vulnerable to computer viruses, physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems. In addition, systems are vulnerable to coordinated attempts to overload them with data, which could result in denial or reduction of service to some or all of our users for a period of time. Furthermore, the failure by the third party providers to provide our required data communications capacity could result in interruptions in our service. Interruptions in our service will reduce our revenues and profits, and our future revenues and profits will be harmed if our users believe that our system is unreliable or insecure. We have experienced system failures from time to time. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We do not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any of these events. Any such event could have a material adverse effect on our business, operating results, and financial condition.

In connection with the evolution of our business model and in order to reduce our cash expenses, we have adopted a number of changes in personnel, including significant workforce reductions and transfers of several employees. The changes in personnel may adversely affect morale and the Company’s ability to attract and retain key personnel. In addition, recent trading levels of our common stock have decreased the value of the stock options granted to employees pursuant to our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies they perceive to have better prospects.

The market for software and services is characterized by rapid technological change, frequent new hardware, software and networking product introductions and Internet-related technology enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. If we do not develop technology that can respond to these changes we will find it very difficult to attract new customers. In particular, we are designing our technology to support a variety of hardware, software and networking products that we believe to be proven and among the most widely used. We can make no assurances, however, that future customers will continue to use these products. Even if they do, as new versions of these products are released, we will need to adapt our technology to keep pace with changes made to hardware and software configurations and network infrastructures.

If we do not develop, license or acquire new technology, or deliver enhancements to existing products on a timely and cost-effective basis, we may be unable to meet the growing demands of potential customers. In addition, as we introduce new services or technologies into existing customer architectures, we may experience performance problems associated with incompatibility among different versions of hardware, software and networking products. To the extent that such problems occur, we may face adverse publicity, delay in market acceptance of our services or customer claims against us, any of which could harm our business.

Our business has involved the licensing of our technology to our customers. Pursuant to our existing licenses, we have made certain representations and warranties and agreed to indemnify our licensees against claims of infringement by third parties. Thus, we may be exposed to a significant risk of liability for intellectual property infringement claims by others. Our success and ability to compete also depend on our ability to operate without infringing upon the proprietary rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results would be significantly harmed.

As part of our normal operations, we purchase or license software products from third party commercial vendors. These products may not continue to be available on commercially reasonable terms, or at all. The loss of these products could result in delays in the sale of our services until equivalent technology, if available, is identified, procured and integrated, and these delays could result in lost revenues. Some of the key components of our services are available only from sole or limited sources. Further, to the extent that the vendors from whom we purchase these products increase their prices, our gross margins could be negatively affected.

In addition to regulations applicable to businesses generally, in connection with our former business of servicing business-to-business marketplaces, we were subject to direct regulation by governmental agencies which includes numerous laws and regulations generally applicable to the chemical, pharmaceutical, controlled substances, human and biological reagents, medical and invitro devices, nuclear chemical businesses and environmental spills, as well as U.S. import and export controls and import controls of other countries. While the shutdown of Chemdex, Promedix and SpecialtyMD may limit future regulatory and product liability risks, until all statutes of limitation have expired, certain legal risks will remain.

We relied on our suppliers to comply with applicable local, state and federal laws regarding the labeling and the dissemination of information on any products sold that may be hazardous or present a health threat to the user. If these suppliers have failed, or we have failed to maintain the requisite records irrespective of the actions of the suppliers, or if either of us have failed to adequately comply with labeling and information dispensing requirements of local, state or federal laws, then we may be held legally responsible, since we held title to these products, and could be subject to governmental penalties or fines, as well as private lawsuits to enforce these laws. We have also relied upon our suppliers to obtain appropriate approvals for products regulated by the Food and Drug Administration (“FDA”) and to comply with the requirements relating to those approvals and products. The failure of suppliers to obtain or comply with those approvals, or the failure of the product advertising or labeling to be consistent with the FDA approval for the products, or other failures by the products themselves, or our failure to keep regulatory records required by the FDA, such as complaint files, could result in costly product recalls, significant fines and judgments, civil and criminal liabilities and negative publicity. In addition, we may discover that we inadvertently sold other regulated products without a requisite license or permit or failed to fully comply with other local, state or federal laws governing these sales.

We are unaware of any current investigations, inquiries, citations, fines or allegations of violations or noncompliance relating to regulatory requirements pending by government agencies or by third parties against us, other than a subpoena we received in February, 2001 from the U.S. Department of Justice, Drug Enforcement Administration, for certain billing, invoice, and shipping records concerning sales to an unaffiliated purchaser, which we complied with. It is also possible that there may be investigations or allegations that we are not aware of or future investigations or allegations. The risk that any noncompliance

As a result of increased contracting with Federal, state and local agencies and their primary contractors, we may become subject to additional laws and regulations not currently applicable to us thereby increasing our administrative burdens. Furthermore, we must comply with any new regulations in both Europe and the United States, as well as any other regulations adopted by other countries where we may do business. Compliance with any newly adopted laws may prove difficult and may harm our business, operating results and financial condition.

Government entities may also terminate their contracts with us earlier than we expect which could result in revenue shortfalls. Government entities may also investigate and audit our contracts and, if any improprieties are found, we may be required to refund revenues we have received and forego anticipated revenues and may be subject to penalties. In addition, if we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for future contracts may be adversely affected.

Several class action lawsuits have been filed and served upon us alleging that we and certain individuals made false and misleading statements concerning our business model and earnings for fiscal 2000 and concerning our initial public offering. Although we believe that we have meritorious defenses to the actions and intend to defend the suits vigorously, we cannot predict with certainty the outcome of these lawsuits. Our defense against such lawsuits has been costly, may require additional expenditures and will require a significant commitment of time and resources by our senior management.

Our revenue growth and future profitability depend on the overall demand for software and related services. This demand can be adversely affected by unfavorable economic conditions, as customers reduce or defer spending on information technology improvements. We may be especially prone to this as a result of the relatively small installed base and operating history of our products. A softening demand for software caused by a prolonged slowdown of the economy would result in decreased revenue or lower revenue growth rates and would adversely affect our operating results.

Recent political events, including the U.S. military action in the Middle East, have put further pressure on economic conditions. The potential turmoil that may result from such events contribute to the uncertainty of the economic climate, further reducing predictability and our ability to develop and implement long-term strategic plans. The impact of these or future similar events may have a material adverse impact on our operating results and financial position.

The stock market and specifically the stock prices of technology related companies have been very volatile. This broad market volatility and industry volatility may reduce the price of our common stock, because our business is Internet-based without regard to our operating performance. On a post reverse split basis, our stock reached a high of $7.25 and a low of $1.34 during fiscal 2002. Our stock reached a high of $4.20 and a low of $1.15 during fiscal 2003. On March 1, 2004 the last quoted price on the OTC Bulletin Board was $1.70.

The following discussion about the Company’s market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related primarily to changes in interest rates. However, we do not hold derivative financial instruments for speculative or trading purposes.

We are also exposed to interest rate risk related to our investment portfolios. We have performed a sensitivity analysis as of December 31, 2003, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of interest rates across the entire yield curve with all other variables constant. The discount rates used were based on the market interest rates in effect at December 31, 2003. The sensitivity analysis at December 31, 2003 indicated that a potential loss in the fair values of our interest rate sensitive investment instruments was not material.

Our convertible and promissory notes are not exposed to interest rate risk as our interest rate is fixed at 6%.

Our sales to-date have primarily been made to U.S. customers and, as a result, we have not had any exposure to factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. If our sales outside of the U.S. increase and are made in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets.

The Consolidated Financial Statements and Supplementary Data required by this Item are set forth in Item 15 below.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.

There has been no change in our internal control of financial reporting during the quarter ended December 31, 2003 that has materially, or is reasonably likely to materially affect, our internal control over financial reporting.

Portions of the information required in Part III of this report are incorporated by reference from the definitive Proxy Statement for the Company’s 2004 annual meeting, which the Company expects to file with the SEC within 120 days following the end of the fiscal year ended December 31, 2003.

The information required by this Item with respect to the Company’s executive officers is incorporated herein by reference from the information contained in Item 1 of Part I of this Report under the caption “Executive Officers of the Registrant.”

The information required by this Item regarding the Company’s directors is incorporated herein by reference from the information provided under the heading “Proposal No. 1 — Election of Directors” of the Company’s Proxy Statement.

The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the information provided under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement.

The information required by this Item with respect to a code of ethics is incorporated herein by reference from the information provided under the heading “Board Meetings and Committees” of the Company’s Proxy Statement.

The information required by this Item is incorporated herein by reference from the information provided under the heading “Compensation of Executive Officers” of the Company’s Proxy Statement.

The information required by this Item is incorporated herein by reference from the information provided under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” of the Company’s Proxy Statement.

The information required by this Item is incorporated herein by reference from the information provided under the heading “Certain Relationships and Related Transactions” of the Company’s Proxy Statement.

Information regarding principal auditor fees and services is set forth under “Principal Auditor Fees and Services” in the Proxy Statement, which information is incorporated herein by reference.

(a)(1) Financial Statements. The following financial statements of NexPrise are filed as part of this annual report on Form 10-K:

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001

(a)(2) Financial Data Schedule. The financial statement Schedule II — VALUATION AND QUALIFYING ACCOUNTS is filed as part of this annual report on Form 10-K, at page 58.

(a)(3) Exhibits. See the Exhibit Index on page 60 hereof. The exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K.

A Report on Form 8-K was filed on October 1, 2003 (Item 5). The report contained information announcing NexPrise, Inc’s sale of its interest in Ingenuity Systems, issued on September 30, 2003.

A Report on Form 8-K was furnished on October 21, 2003 (Item 12). The report contained information announcing NexPrise, Inc. earnings release issued on October 17, 2003.

A Report on Form 8-K was furnished on December 03, 2003 (Item 5). The report contained information announcing NexPrise, Inc. move to the OTC Bulletin Board on December 05, 2003.

We have audited the accompanying consolidated balance sheets of NexPrise, Inc. (formerly “Ventro Corporation”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in Item 15(a)(2). These financial statements and 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 consolidated financial position of NexPrise, Inc. at December 31, 2003 and 2002 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 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 1 to the consolidated financial statements, effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”).

NexPrise, Inc. (the “Company” or “NexPrise” or “we”), formerly known as Ventro Corporation and Chemdex Corporation, is a seller of business process automation and management applications and collaborative solutions for program management and quote management. Our revenue primarily consists of subscriptions of bundled license, post contract support (PCS) and, in most cases, hosting services.

In 2001, we significantly restructured our operations and focused on a new business direction. We exited the business of building and servicing business-to-business marketplaces and entered the business of providing collaborative and business process automation software solutions. In August 2001, while doing business under the name Ventro Corporation, we acquired privately-held NexPrise, Inc., a company with an advanced collaborative software solution and an established customer base located in Santa Clara, California. Later in the year we reorganized our management team and Board of Directors and took measures to reduce commitments and operating expenses and conserve cash. In January 2002, we changed our name to NexPrise, Inc. On February 4, 2002, we acquired privately-held InfoPrise, located in Carlsbad, California, and combined its data management technology with our existing collaborative solutions infrastructure to produce the business process automation applications and development platform that are now our primary product offerings. All operating results presented for periods following the above date are derived from the combined operations of NexPrise and InfoPrise.

Cash used in operations decreased to $5.3 million from $14.7 million in 2002. To reduce operating expenses, the Company eliminated several positions, primarily in the sales and marketing functions, in January 2004. Management believes that its restructuring activities, including the elimination of several positions in January, 2004, have reduced its ongoing operating expenses such that the Company will have sufficient working capital to support planned activities through 2004 and beyond.

As of December 31, 2003, the Company had working capital of approximately $4.0 million, including cash, cash equivalents and short-term investments of $6.0 million. At December 31, 2003, the Company had a stockholders’ deficit of approximately $7.3 million. During the year ended December 31, 2003, the Company used cash, cash equivalents and short term investments to fund operating activities of approximately $5.3 million and received cash proceeds of $1.0 million on the sale of an investment. During the fourth quarter of 2003, the Company used cash and cash equivalents in operating activities of approximately $1.7 million. Management is committed to the successful execution of our operating plan and will take further action as necessary to align our operations and reduce expenses.

On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). SFAS No. 145 allows only those gains and losses on the extinguishment of debt that meet the criteria of extraordinary items to be treated as such in the consolidated financial statements. Accordingly, the Company is now reporting the gain from retirement of Convertible Notes in operating results. As a result of adopting SFAS No. 145, the Company reclassified the $159.8 million previously recorded in 2001 as extraordinary gain as a component of operating results.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. While the quarterly financial information is unaudited, the financial statements included in this Form 10-K reflect all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of

the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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

For all arrangements, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. Our revenue recognition policy is in accordance with SOP No. 97-2, Software Revenue Recognition, as amended, Staff Accounting Bulletin 101 and EITF 00-21, Revenue Arrangements with Multiple Deliverables.

Perpetual license revenue is recognized using the residual method described in Statement of Position (“SOP”) No. 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element (for example, undelivered maintenance and support, training and consulting). The determination of fair value is based upon vendor specific objective evidence (“VSOE”). VSOE of the fair value of maintenance for license agreements with and without stated renewal rates is based on the Company’s price list. VSOE of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by the Company’s customers when maintenance is sold separately. Past history has shown that the rate the Company charges for maintenance on license agreements with a stated renewal rate is similar to the rate the Company charges for maintenance on license agreements without a stated renewal rate. Revenue for training or consulting is based upon separate sales of these services. When software services are considered essential or the arrangement involves significant customization or modification of the software, both the net license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on input measures of hours, or completed contract method. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue.

Revenue for training or consulting services is recognized based upon contract completion or on a time and materials basis.

The Company reviews property, plant and equipment, goodwill and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. This impairment analysis is required to be performed at least annually for goodwill and purchased intangibles with indefinite useful lives. Also, potential impairment of long-lived assets other than goodwill and purchased intangible assets with indefinite useful lives is evaluated using the guidance provided by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

The Company considers all highly liquid investment securities with original maturities of three months or less to be cash equivalents. Management determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Marketable securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included in stockholders’ equity. Realized gains and losses on available-for-sale securities are included in interest income.

The Company capitalizes product development costs in accordance with SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed, and EITF 00-2, Accounting for Web Site Development Costs, under which certain software development costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products. We determine technological feasibility to be established upon the internal release of the product for acceptance testing. Upon the general release of the product to customers, development costs for that product are amortized based on the estimated economic life of the product.

There were no internally developed software costs capitalized at December 31, 2003 and 2002. To date, substantially all software development costs have been expensed as incurred because the time from working model to saleable model is very short.

The Company expenses any acquired in-process research and development in the year of acquisition. The in-process research and development expensed in 2002 was acquired as a result of the InfoPrise acquisition in February 2002. The in-process research and development expensed in 2001 was acquired as a result of the NexPrise acquisition in August 2001. The Company determined the amounts of in-process research and development through independent valuations in connection with the allocation of purchase price.

NexPrise records property and equipment at cost and calculates depreciation using the straight-line method over estimated useful lives of three to five years. Property under capital leases is depreciated over the lesser of the useful lives of the assets or lease term.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transition guidance and disclosure provisions of SFAS 148 are effective for the Company’s financials statements issued for 2003.

The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its employee stock options. Accordingly, no compensation expense is recognized in the Company’s financial statements in connection with employee stock awards where the exercise price of the award is equal to the fair market value of the stock on the date of grant. When stock options are granted with an exercise price that is lower than the fair market value of the stock on the date of grant, the difference is recorded as deferred compensation and amortized to expense on a straight-line basis over the vesting term of the stock options.

Pro forma information regarding net loss and net loss per share is required by FAS 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called “stock-based awards”), under the fair value method of FAS 123. Stock-based awards have been valued using the Black-Scholes option-pricing model. Among other things, the Black-Scholes model considers the expected volatility of the Company’s stock price, determined in accordance with FAS 123, in arriving at an option valuation.

The fair value of the Company’s stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because the Company’s stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards.

For purposes of pro forma disclosures, the estimated fair value of the stock-based awards is amortized straight line over the life of the award. The pro forma stock-based employee compensation expense has no

impact on the Company’s cash flow. In the future, the Company may elect, or be required, to use a different valuation model, which could result in a significantly different impact on pro forma net income (loss). For purposes of this reconciliation, the Company adds back to previously reported net income all stock-based employee compensation expense that relates to acquisitions, then deducts the pro forma stock-based employee compensation expense determined under the fair value method for all awards. The Company’s pro forma information is as follows (in thousands, except per share amounts) and fiscal years 2002 and 2001 have been amended to include the intrinsic value compensation expense and to include the estimated fair value of all stock grants at year end not only those granted in that year as had been previously reported:

Advertising costs are charged to expense when incurred. Advertising expense was $0, $0 and $0 for the years ended December 31, 2003, 2002 and 2001.

SFAS No. 130, Reporting Comprehensive Income, establishes standards of reporting and display of comprehensive income and its components of net income (loss) and “Other Comprehensive Income” in a full set of general purpose financial statements. “Other Comprehensive Income” refers to revenues, expenses, gains and losses that are not included in net income (loss) but rather are recorded directly in stockholders’ equity.

Net income (loss) per share is presented in accordance with the requirements of SFAS No. 128, Earnings Per Share, which requires dual presentation of basic earnings per share (“EPS”) and diluted EPS.

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common

shares and potentially dilutive shares outstanding during the period. If NexPrise had reported income from continuing operations instead of losses, diluted earnings per share would have included the shares used in the computation of basic net income (loss) per share as well as an additional 168,000 and 29,000 common share equivalents related to the outstanding options and warrants (determined using the treasury stock method) for the periods ended December 31, 2003 and 2002. These options and warrants could potentially dilute basic earnings per share in the future but have not been included in the computation of diluted net income (loss) per share as the impact would have been antidilutive on the loss per share from continuing operations for the periods presented and, in accordance with FAS 128, the same number of shares is used to calculate diluted per share amounts from continuing operations, discontinued operations, extraordinary items and net gain (loss), regardless of whether the line items other than continuing operations display income or loss.

The following table presents the calculation of basic and diluted loss per share from continuing and discontinued operations and net loss per common share as of December 31 (in thousands, except per share data):

The Company is involved in certain claims and litigation related to its operations, including ordinary, routine litigation incidental to its business. Management reviews and determines which liabilities, if any, arising from these claims and litigation could have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. In reviewing these claims and litigation, management

assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accruals required, if any, for these contingencies is made after analysis of each matter, which includes discussion with counsel retained in such matter. The required accruals may change in the future due to new developments in a matter or changes in strategies to resolve that matter, including changes in litigation defense and settlement strategies. The Company had no accruals for legal contingencies at December 31, 2003.

The Company from time-to-time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; (ii) certain agreements with the Company’s officers, directors and employees and third parties, under which the Company may be required to indemnify such persons for liabilities arising out of their duties to the Company and (iii) agreements under which the Company indemnifies customers and partners for claims arising from intellectual property infringement.

Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of December 31, 2003 and 2002.

The Company warrants to its customers that its software products will operate substantially in conformity with product documentation and that the physical media will be free from defect. The specific terms and conditions of the warranties are generally 30 days but may vary depending upon the country in which the software is sold. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified warranty issues based on historical activity. To date the Company has had no material warranty claims. Due to thorough product testing, the short time between product shipments and the detection and correction of product failures, no history of material warranty claims, and the fact that no significant warranty issues have been identified, the Company has not recorded a warranty accrual to date.

The Company has entered into certain real estate leases that require the Company to indemnify property owners against certain environmental and other liabilities and other claims.

The Company only engages in the development, marketing and distribution of software, and it has never had any environmental related claim. Therefore, the likelihood of incurring a loss related to these environmental indemnifications is remote and thus the Company is unable to reasonably estimate the amount. Therefore, the company has not recorded a related liability in accordance with the recognition and measurement provisions of FAS 143, Accounting for Asset Retirement Obligations (“FAS 143”).

NexPrise accounts for income taxes using the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109 (“SFAS 109”), Accounting for Income Taxes. Under the asset and liability method, a current tax asset or liability is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Management must make significant judgments to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. In the future, if sufficient evidence of the Company’s ability to generate sufficient future taxable income in certain jurisdictions becomes apparent, the Company may be required to reduce its valuation allowances, resulting in income tax benefits in the Company’s consolidated statement of operations. The Company has provided a full valuation allowance as of December 31, 2003. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for a valuation allowance quarterly.

SFAS 142, Goodwill and Other Intangible Assets, requires that we evaluate on an annual basis (or whenever events occur which may indicate possible impairment) whether any portion of our recorded goodwill is impaired. This analysis requires management to make a series of critical assumptions to: (1) evaluate

whether any impairment exists, and (2) measure the amount of impairment. The Company performed the required transitional impairment test of the goodwill acquired as part of its acquisition of NexPrise as of January 1, 2002 and, with the assistance of third party valuation experts, performed the annual impairment test as of September 30, 2002. In each case, the tests did not identify an impairment of the goodwill balance. In the fourth quarter of 2002 our market capitalization decreased to a value at December 31, 2002 that was approximately $14 million less than our book value prior to any impairment charges. That decrease and a reduction in forecast revenues led us to conclude there were sufficient indicators to warrant an evaluation of whether any portion of our $11.7 million of recorded goodwill was impaired in the fourth quarter of 2002. That analysis resulted in an impairment charge equal to the entire $11.7 million balance in the fourth quarter of 2002. The remaining identified intangible assets were also tested for impairment at that time. No impairment was found, as the value of the undiscounted cash flows expected to be generated by these assets over their estimated lives as of December 31, 2002 exceeded their carrying value of $9.2.

In accordance with our policy for assessing the carrying value of our long lived assets, in each quarter of 2003 we compared the carrying value of the intangible assets with the undiscounted cash flows expected to be generated by those assets over their remaining estimated useful lives. No indicators of impairment were found in the first, second or third quarters of 2003. In the fourth quarter of 2003 a reduction in our revenue forecast and a reduction in the estimated useful lives of the intangible assets due to our fourth quarter decision to adopt a plan to transition toward an indirect channel solution led us to conclude there were indicators the intangible assets were impaired. The resulting analysis of discounted cash flows led to an impairment charge of approximately $6.4 million, leaving approximately $139,000 of intangible assets to be amortized evenly over 2004. Of that value, approximately $137,000 is purchased technology related to the acquisitions of NexPrise and InfoPrise and approximately $2,000 is for a non-compete agreement signed at the time of the NexPrise acquisition. During 2004, we will continue to evaluate these intangible assets for impairment as events and circumstances warrant. If an impairment is determined, further write-offs may be required.

Goodwill and intangible assets with indefinite lives are shown as goodwill on the face of the balance sheet. The changes in the net carrying amount of goodwill are as follows:

Subsequent to the adoption of SFAS 142, identifiable intangible assets with definite lives will continue to be amortized over their useful lives and are reviewed for impairment in accordance with SFAS 144 when

impairment indicators exist. These assets are shown as intangible assets on the face of the balance sheet and are as follows (in thousands):

NexPrise purchased technology was amortized based on forecast revenue over 5 years. InfoPrise purchased technology was amortized based on forecast revenue over 3 years. The NexPrise trade name and non-compete intangible assets were amortized using a straight line method over 2 and 3 year periods, respectively. All remaining NexPrise and InfoPrise intangible assets will be fully amortized using a straight line method over their remaining useful lives, which extend through the end of 2004. The amortization of purchased intangible assets was $2.3 million in 2002, including $399,000 of in-process research and development. Estimated amortization expense for the year ended December 31, 2004 is $139,000.

Expenses for the amortization and write-down of goodwill and other intangible assets was $9.0 million, $13.9 million and $3.3 million for the years ended December 31, 2003, 2002 and 2001 respectively.

On February 4, 2002 we acquired privately-held InfoPrise, a provider of data management solutions located in Carlsbad, California. As consideration for the acquisition, we issued to InfoPrise’s stockholders an aggregate of 139,790 shares of NexPrise common stock together with unsecured 6% promissory notes due in 2007 with a face value of $3,040,000 that are convertible into the Company’s common stock at a per share conversion price of $18.75. We also assumed InfoPrise’s outstanding stock options, which may result in the issuance of up to approximately 64,000 shares of common stock if all of the assumed options are exercised. As of December 31, 2003, 1,820 of these options had been exercised. All operating results presented for periods following the above date are derived from the combined operations of NexPrise and InfoPrise. The Company determined the value of the intangible assets associated with the InfoPrise purchase through the use of estimates, forecasts and an independent valuation study.

The following table summarizes the forms of consideration and their fair values (in thousands):

The Company announced on July 16, 2001 that it had signed a definitive agreement to purchase privately held NexPrise, Inc., a provider of collaborative commerce solutions located in Santa Clara, California. The transaction was completed on August 8, 2001, and the operating results of NexPrise are reflected in the Company’s statement of operations from that date forward. The purchase of NexPrise was undertaken to accelerate our product development cycle and enable the Company to offer a comprehensive, proven collaborative commerce solution with the depth and breadth of capabilities required to address the critical e-business needs of customers in the aerospace, automotive, and process industries. The price paid for NexPrise resulted in goodwill of $11.7 million. Key elements of the purchase that are not valued separately in purchase accounting, such as the members of the NexPrise management team and workforce that joined the Company upon completion of the acquisition and NexPrise’s customers , contribute to the generation of goodwill. An escrow fund of $1.5 million was established to absorb significant liabilities discovered in the 12 months following the acquisition. No significant liabilities were discovered and the escrow account has been settled.

The following tables summarize the form of consideration and fair values (in thousands):

The following unaudited pro forma information shows the results of operations of the Company for the 12 months ended December 31, 2002 and 2001 as if the business combinations with NexPrise and InfoPrise had occurred at the beginning of each period. In process research and development charges of $399,000 are included for the 12 months ended December 31, 2002. This data is not indicative of the results of operations that would have arisen if the business combinations had occurred at the beginning of the respective periods and is not intended to be indicative of future results of operations (in thousands except per share data).

All available-for-sale securities as of December 31, 2003 and 2002 have a contractual maturity of one year or less.

Property and equipment consisted of the following as of December 31, (in thousands):

Other current assets of $362,000 and $841,000 as of December 31, 2003 and 2002, respectively, are comprised primarily of prepaid royalties, current deposits and other receivables.

In April, 2000, the Company and Entangible.com announced the formation of Amphire, a business-to-business e-commerce company in the food service market. The Company acquired a minority interest in Amphire for cash and equity totaling $35 million, which was written off in 2000. In January, 2001, the Company contributed $2.0 million to Amphire’s Series B Preferred Stock Financing. In connection with the financing, the Company terminated its technology and service agreements with Amphire. In August 2002, the Company sold all of its interest in Amphire for cash and recognized a gain of $1.8 million. The investment was accounted for using the equity method.

In August, 2000, the Company and American Express Company announced the formation of MarketMile, a new business-to-business e-commerce company in the business products and services market. The Company made cash investments of $13.0 million, $4.0 of which was made in January, 2001, and account for the investment using the equity method. In April 2001, MarketMile decided not to use our technology and asserted that we had breached our contract with MarketMile, a claim which the Company disputed. The parties reached a settlement in October 2001 whereby we reduced our equity investment in MarketMile to 20% and the bulk of the receivables due from MarketMile were written off. Correspondingly, MarketMile released all claims on a $5 million customer advance. The net effect of the settlement was a gain reported in the fourth quarter 2001 of less than $1 million. In 2002 MarketMile changed its name to Ketera Technologies.

The following table outlines the Company’s equity investment activity with its marketplace companies for the years ended December 31, 2001, 2002 and 2003 ($ in thousands):

In the year ended December 31, 2001 the Company billed the affiliated marketplace companies approximately $3.7 million, net of reserves. The billings were for charges incurred on behalf of the marketplace companies, services the Company provided and facility rent that we passed on and occurred

primarily in the first quarter of the year. These amounts were included in settlements with the marketplace companies.

At March 31, 2001, we had approximately a 19% interest in Broadlane, a business-to-business e-commerce company in the healthcare industry that we formed with Tenet Healthcare in January 2000. The investment was accounted for using the cost method. In April, 2001, the Company and Broadlane settled several disputes between the two companies and severed relationships with each other. Under the terms of the agreement, Broadlane repurchased all of its shares owned by the Company and the parties resolved all disputes relating to amounts owed to the Company for an aggregate payment of $11 million. The payment was made in the form of a two year interest-bearing note from Broadlane, which was guaranteed by Tenet Healthcare Corporation. (See Note 11 and 13)

Other long-term assets were comprised of the following as of December 31, (in thousands):

During the second quarter of fiscal 2002 the Company entered into loan agreements totaling $75,000 with an executive and another member of the management team. The loans are full recourse, accrue interest at 6% per annum, are due the earlier of, (a) April 2005, (b) one year from the effective date of the termination of employment with the Company or (c) the sale of note collateral, and are included in the other long term assets above.

On September 30, 2003, the Company sold its interest in Ingenuity Systems, a long-term investment accounted for under the cost method, to an unrelated party for cash proceeds of $1 million. As a result, a net gain for fiscal year 2003 of $287,000 was recorded representing the proceeds of the sale less the carrying value of $613,000 and a fee under a net proceeds income agreement payable to DDP Ventures in the amount of $100,000. DDP Ventures is a related party owned by a former Chief Executive Officer of the Company and pursuant to the Net Proceeds Agreement signed in 2001, DDP Ventures is entitled to 10% of the net proceeds received by the Company for the liquidation of each of certain named investment assets.

Accrued expenses were comprised of the following as of December 31, (in thousands):

During the year ended December 31, 2001, the Company took many actions to improve efficiencies and reduce operating costs. The specific actions outlined below include employee and contractor terminations, consolidation of facilities, settlements of various disputes and termination of leases. The net of these charges was reported as a component of loss from continuing operations.

On April 26, 2001, the Company announced a restructuring plan in connection with its efforts to improve efficiencies and cut operating costs. The restructuring included a workforce reduction, consolidation of excess facilities, write-offs and accruals with respect to certain assets and commitments, as well as termination of services for the Broadlane, MarketMile and Industria marketplaces. As a result, the Company recorded a net charge of $14.7 million during the three months ended June 30, 2001 which included: a) a workforce reduction charge of $3.6 million primarily related to the cost of severance and related benefits for the termination of approximately 170 employees, b) $7.5 million of estimated remaining lease payments and the cost recoveries anticipated from subleases related to excess leased facilities and equipment and c) a write-off of the difference between the net book value of the assets and the anticipated salvage value of computer and networking equipment and related software of $9.5 million. These charges were partially offset by a gain of $6 million for settlements and write-downs associated with the marketplace companies: Broadlane, Industria and MarketMile. The gain primarily consisted of receipt of an $11 million two year interest-bearing promissory note from Broadlane (guaranteed by Tenet Healthcare Corporation) and cash and certain assets from Industria, offset by accruals and write-downs of receivables from the marketplace companies.

In the three months ended September 30, 2001 the Company recorded $5.3 million of restructuring charges. These charges consisted of approximately $1.4 million of severance and other related costs associated with the employees terminated in connection with the acquisition of NexPrise and $3.9 million of expense accrued for changes in anticipated reduced cost recoveries related to disposal of excess facilities and equipment.

In the three months ended December 31, 2001 the Company recorded a $3.4 million gain from restructuring and settlement. The gain was driven by better than expected settlements related to the termination of excess facilities and equipment leases and the settlement with MarketMile and were partially offset by charges related to additional employee terminations and excess equipment.

The following table summarizes the restructuring and settlement activity in 2001 (in thousands):

In the three months ended June 30, 2002 the activity involving the settlement, restructuring and other accrual consisted primarily of a $989,000 reduction of a charge initially accrued in December 2001 for estimated contractual liabilities for which actual expenses were less than originally estimated. This was partially offset by a $652,000 increase of an equipment write-off initially estimated in December 2001, a $200,000 charge for the settlement of a stockholder lawsuit and $137,000 of charges for employee terminations.

In the three months ended September 30, 2002 the activity involving the settlement, restructuring and other accrual consisted primarily of restructuring charges of approximately $242,000 related to a reduction in force undertaken in September 2002, a $182,000 reduction of a charge initially accrued in December 2001 for estimated contractual liabilities for which actual expenses were less than originally estimated and the realization of additional cash proceeds of approximately $60,000 from the liquidation of excess equipment originally written off in the restructuring events of 2001.

In the three months ended December 31, 2002 the activity involving the settlement, restructuring and other accrual consisted primarily of settlement charges of approximately $244,000 related to the termination of a facility lease, a $228,000 reduction of a charge initially accrued in December 2001 for estimated contractual liabilities for which actual expenses were less than originally estimated and the realization of additional cash proceeds of approximately $16,000 from the liquidation of excess equipment originally written off in the restructuring events of 2001.

During the year ended December 31, 2003, the Company paid approximately $12,000 in severance payments. Also, the Company reversed the remaining accrual of $493,000 related to the Company’s cancellation of a contract as part of a restructuring in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activity ceased and no actual charges had been, or are now expected to be, paid.

At December 31, 2003 and 2002 the Company had accruals and reserves of $0 and $505,000, respectively. An analysis of the 2002 and 2003 activity is as follows (in thousands):

The Company leases its office facilities under non-cancelable operating leases expiring through 2006. Minimum annual operating lease commitments as of December 31, 2003 are as follows (in thousands):

In November 1999, the Company entered in a facilities sublease agreement for its former headquarters. The sublease term commenced on December 1, 1999 and ended on December 31, 2003. Late in 2001 and 2002, the Company signed agreements terminating certain lease agreements. See Settlements and Restructuring.

Rent expense for the years ended December 31, 2003, 2002 and 2001 approximated $1,275,000, $2,058,000 and $3,936,000. This was offset by sublease income for the years ended December 31, 2003, 2002 and 2001 of approximately $1,231,000, $1,192,000 and $1,200,000.

In April 2000, NexPrise (then Ventro) incurred $250 million of indebtedness (“Notes”) in connection with the issuance of convertible subordinated Notes whereby the Company received net cash proceeds of $242.5 million. The Notes are due in 2007, bear annual interest at 6%, and are convertible at the option of the holder into the Company’s common stock at a price of $1,361.70 per share subject to adjustment if certain events affecting our common stock occur. The Company may redeem the Notes, as a whole or in part, on or after April 4, 2003. The Notes are unsecured and are subordinated to existing and future senior debt as defined in the indenture pursuant to which the Notes were issued. Interest on the Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2000. The Notes could be declared immediately due and payable if we do not make timely interest payments. The deferred debt offering costs were approximately $9.3 million and are being amortized to interest expense over the life of the Notes.

During 2001, the Company repurchased $241.2 million of the convertible subordinated Notes for cash and assigned an $11 million promissory note from Broadlane Inc. as consideration for the Notes and the accrued interest thereon. The transaction resulted in an extraordinary gain of $159.7 million (the extraordinary item was reclassed to other income in accordance with SFAS No. 145, see below). The gain consisted of a gain of $170 million due to the discount, offset by the write-off of $7.7 million in issue costs associated with

the original issuance of the Notes in April 2000 as well as $2.9 million of costs associated with the retirement of the Notes. On January 1, 2003, the Company adopted SFAS No. 145. Accordingly, the Company is now reporting the gain from retirement of the bonds in operating results. As a result of adopting SFAS No. 145, the Company reclassified the $159.8 million previously recorded in 2001 as extraordinary gain as a component of operating results.

At December 31, 2003, $8.8 million of convertible Notes remained outstanding and the remaining unamortized issue costs were approximately $152,000.

In February 2002 NexPrise acquired privately held InfoPrise, Inc., a provider of data management solutions located in Carlsbad, California. As part of the consideration for the acquisition, NexPrise agreed to issue unsecured convertible promissory notes with a face value of $3,040,000 due 2007. The notes bear interest at a rate of 6% and are convertible to the Company’s common stock at $18.75 per share.

The Board of Directors has the authority, within the limitations and restrictions in the Amended and Restated Certificate of Incorporation, to issue 2,500,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of any series, without further vote or action by the stockholders. No preferred stock was issued or outstanding at December 31, 2003 or 2002.

In February 2000, in conjunction with the Company’s acquisition of SpecialtyMD, the Company converted 11,087 outstanding and exercisable warrants for shares of SpecialtyMD Series B preferred stock into warrants exercisable for an aggregate of 1,145 shares of NexPrise common stock having the same terms and conditions as the SpecialtyMD warrants. These warrants have an exercise price of $158.25 and are exercisable through September 10, 2009.

In April 2002, the Company effected a reverse split of the Company’s common stock. As a result of the reverse stock split, every 15 shares of the Company’s old common stock issued and outstanding were automatically converted into one new share of common stock. The financial data has been adjusted to reflect the reverse stock split.

At December 31, 2003 no shares of the Company’s common stock were subject to repurchase. At December 31, 2002 there were approximately 17,000 shares of common stock subject to repurchase. The stock repurchase arrangement vested over a period of seventeen months. No shares were repurchased in the fiscal years ended December 31, 2003 and December 31, 2002. In the fiscal year ended December 31, 2001, 18,851 shares were repurchased.

Shares of common stock available for future grants under all stock option plans was 61,077 at December 31, 2003.

In September 2001, our Board of Directors authorized a stock repurchase program to repurchase shares for an amount not to exceed $2 million through March 2003. Under the stock repurchase program, we repurchased approximately 29,000 shares of our common stock at a cost of approximately $237,000 during the

period from September 26, 2001 through December 31, 2002. The Company did not repurchase any shares in 2003.

The par value method of accounting is used for our common stock repurchases. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital.

NexPrise’s 1998 Stock Plan provides for the granting of stock options and stock purchase rights to eligible employees, officers, directors, including non-employee directors, and consultants of NexPrise. Stock options granted under the 1998 Stock Plan may be either “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or “non-statutory stock options”, which are options not intended to qualify as incentive stock options. Stock purchase rights granted under the 1998 Stock Plan allow a recipient to purchase shares of common stock directly from NexPrise. Incentive stock options may be granted to employees, officers and employee directors of NexPrise and nonstatutory stock options and stock purchase rights may be granted to employees, officers, directors and consultants.

As of December 31, 2003, 1,065,460 shares of common stock were issuable upon the exercise of outstanding options granted under the 1998 Stock Plan at a weighted average exercise price of $14.243 per share. For the fiscal year ended December 31, 2003, no shares of common stock have been issued upon exercise of options or pursuant to stock purchase and 56,572 shares of common stock remained available for future issuance under the 1998 Stock Plan. The 1998 Stock Plan was originally adopted by the Board of Directors in January 1998 and approved by the stockholders in March 1998. In May 1999 the Board of Directors authorized an automatic annual increase on the first day of each of our fiscal years beginning in 2000, 2001, 2002, 2003, and 2004 equal to the lesser of 83,333 shares, 3% of our outstanding common stock on the last day of the preceding fiscal year or a lesser number determined by the Company’s Board of Directors. Shareholders approved increases in the number of common shares available for issuance under the Company’s 1998 Stock Plan to a total of 1,240,525 shares. Unless terminated earlier by our Board of Directors, the 1998 Stock Plan will terminate in January 2008.

On August 8, 2001, in connection with the acquisition of privately-held NexPrise, Inc., the Company assumed the privately-held NexPrise, Inc’s 1997 Stock Plan. Under the 1997 Stock Plan, 155,296 outstanding and unexercised options of privately-held NexPrise, Inc. converted into 124,239 options of the Company’s common stock having the same terms and conditions as the privately-held NexPrise, Inc. options after giving effect to the 0.80 exchange ratio in the merger. As of December 31, 2003, 43,485 shares of common stock were issuable upon the exercise of outstanding options granted under the 1997 Stock Plan at a weighted average exercise price of $5.782 per share. For the fiscal year ended December 31, 2003, no shares of common stock have been issued upon exercise of options or pursuant to stock purchase rights and no shares of common stock remain available for future issuance under the 1997 Stock Plan.

On August 8, 2001, the Company assumed the privately-held NexPrise, Inc. Nonstatutory Stock Plan. Under the Nonstatutory Stock Plan, 136,584 outstanding and unexercised options of privately-held NexPrise, Inc. converted into 109,267 options of the Company’s common stock having the same terms and conditions as the privately-held NexPrise, Inc.’s options after giving effect to the 0.80 exchange ratio in the merger. As of December 31, 2003, 100,676 shares of common stock were issuable upon the exercise of outstanding options granted under the Nonstatutory Stock Plan at a weighted average exercise price of $4.272 per share. For the fiscal year ended December 31, 2003, 8,590 shares of common stock have been issued upon exercise of options

or pursuant to stock purchase rights at exercise or purchase prices ranging between $0.95 to $4.650 and no shares of common stock remain available for future issuance under the Nonstatutory Stock Plan.

On February 4, 2002 in connection with the acquisition of privately-held InfoPrise, Inc., the Company assumed the privately-held InfoPrise, Inc’s 2000 Equity Incentive Plan. Under the 2000 Equity Incentive Plan, 90,500 outstanding and unexercised options of privately-held InfoPrise, Inc. converted into 60,335 options of the Company’s common stock having the same terms and conditions as the privately-held InfoPrise, Inc. options after giving effect to the 0.6667 exchange ratio in the merger. As of December 31, 2003, 59,631 shares of common stock were issuable upon the exercise of outstanding options granted under the 2000 Equity Incentive Plan at a weighted average exercise price of $1.050 per share. For the fiscal year ended December 31, 2003, no shares of common stock have been issued upon exercise of options or pursuant to stock purchase rights and no shares of common stock remain available for future issuance under the 2000 Equity Incentive Plan.

On February 4, 2002 the Company assumed the privately-held InfoPrise, Inc. 2000 NonEmployee Equity Incentive Plan. Under the 2000 NonEmployee Equity Incentive Plan, 5,547 outstanding and unexercised options of privately-held InfoPrise, Inc. converted into 3,698 options of the Company’s common stock having the same terms and conditions as the privately-held InfoPrise, Inc.’s options after giving effect to the 0.6667 exchange ratio in the merger. For the fiscal year ended December 31, 2003, no shares of common stock were issuable upon the exercise of outstanding options or pursuant to stock purchase rights and no shares of common stock remain available for future issuance under the 2000 NonEmployee Equity Incentive Plan.

NexPrise’s 1999 Directors’ Stock Plan was adopted by the Board of Directors in May 1999 and was approved by the stockholders in July 1999. The directors’ Plan provides for the grant of nonstatutory stock options to non-employee directors of NexPrise.

The Directors’ Plan as amended provides that each person who is or becomes a non-employee director of NexPrise will be granted a non-statutory stock option to purchase 1,666 shares of common stock on the date which the optionee first becomes a non employee director of NexPrise. Thereafter, on the date of NexPrise’s Annual Stockholders Meeting each year, each non-employee director of NexPrise will be granted an additional option to purchase 1,666 shares of common stock if, on that date, he or she has served on NexPrise’s Board of Directors for at least six months.

The Directors’ Plan provides that each option granted under the directors’ Plan shall vest and become exercisable in full immediately upon grant of the option. The exercise price of all stock options granted under the Directors’ Plan shall be equal to the fair market value of a share of NexPrise’s common stock on the date of grant of the option. Options granted under the Directors’ Plan have a term of 10 years.

The Board of Directors may amend or terminate the Directors’ Plan; provided, however, that none of these actions may adversely affect any outstanding option. The Company will obtain stockholder approval for any amendment to the extent required by applicable law. If not terminated earlier, the Directors’ Plan will have a term of 10 years.

As of December 31, 2003, 9,996 shares of common stock were issuable upon the exercise of outstanding options granted under the 1999 Stock Plan at a weighted average exercise price of $3,736 per share. For the fiscal year ended December 31, 2003, no shares of common stock have been issued upon exercise of options or pursuant to stock purchase rights at exercise or purchase prices ranging between $1.520 and $5.55 per share. As of December 31, 2003, 4,505 shares of common stock remain available for future issuance under the 1999 Directors’ Stock Plan.

NexPrise’s 1999 Employee Stock Purchase Plan was adopted by the Board of Directors in May 1999 and was approved by the stockholders in July 1999. A total of 50,000 shares of common stock was initially reserved for issuance under the purchase plan, as well as an automatic annual increase on the first day of each of NexPrise’s fiscal years beginning in 2001, 2002, 2003 and 2004 equal to the lesser of 13,333 shares, or 1/2% of NexPrise’s outstanding common stock on the last day of the immediately preceding fiscal year. Stockholders approved an increase in the number of common shares available for issuance under the Company’s 1999 Employee Stock Purchase Plan to a total of 120,920 shares. As of December 31, 2003, 29,956 shares have been issued under the 1999 Employee Stock Purchase Plan.

The Employee Stock Purchase Plan was terminated by the NexPrise Board of Directors effective February 17, 2004.

Stock option activity for all our stock plans was as follows (in thousands, except per share data):

The following table summarizes information about stock options outstanding as of December 31, 2003 (in thousands, except per share data):

In connection with the acquisition of InfoPrise completed in February 2002, the Company assumed the outstanding options granted under the InfoPrise stock option plans. The Company recorded deferred compensation of $132,293 for the difference between the exercise price of the unvested options assumed and the fair value of the common stock underlying those options as of the date the acquisition was consummated. That charge is being amortized over the remaining vesting period of the options. Additionally, the Company recorded deferred compensation of $184,178 with respect to the issuance of restricted common stock. That charge is being amortized over the remaining vesting period of the stock.

In fiscal 2001 the Company recorded deferred compensation for options assumed under the NexPrise acquisition of $686,897 for the difference at the option grant date between the exercise price and the fair value of the common stock underlying the options in accordance with FASB Interpretation No. 28. These options are being amortized over the vesting schedule. In 2001 the Company reversed $873,354 of deferred compensation charges in connection with employee terminations. The remaining deferred stock compensation balance is being amortized over the vesting periods of the stock options.

As of December 31, 2000 the Company had recorded aggregate deferred stock compensation of $8.7 million, $6.6 million of which was associated with discontinued operations.

The Company recognized approximately $272,000, $349,000 and $273,000 in stock compensation expense from continuing operations during the years ended December 31, 2003, 2002 and 2001. Deferred compensation is reduced in the period of forfeiture for any accrued but unvested compensation arising from the early termination of an option holder’s services. In 2003 the Company reversed $1,000 of deferred compensation in connection with terminated employees. At December 31, 2003, unamortized deferred stock compensation was $142,913.

NexPrise has a 401(k) Plan that allows eligible employees to contribute up to 60% of their salary, subject to annual limits. Under the plan, eligible employees may defer a portion of their pretax salaries but not more than statutory limits. NexPrise may make discretionary contributions to the plan based on profitability as

determined by the Board of Directors. NexPrise did not make any contributions to the plan during the years ended December 31, 2003, 2002 and 2001.

Due to operating losses and the Company’s inability to recognize an income tax benefit from current losses, there is no provision for income taxes for the years ended December 31, 2003, 2002 or 2001.

As of December 31, 2003, the Company had net operating loss carry forwards for federal income tax purposes of approximately $167.8 million which expire in the years 2013 through 2023 and federal research and development tax credits of approximately $1.2 million which expire in the years 2013 through 2023. In addition, the Company had approximately $16.7 million in State net operating loss carry forwards that will expire beginning in 2012 and approximately $1.9 million in state research and development credits that will not expire. Utilization of the Company’s net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before utilization.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $810,000 during 2003 and increased by $11.7 million during 2002. Approximately $7 million of the valuation allowance at December 31, 2002 is attributable to stock option deductions, the benefit of which will be credited to paid-in capital when realized.

Significant components of the Company’s deferred tax assets are as follows (in thousands):

Financial instruments that potentially subject NexPrise to credit risk consist primarily of uninsured cash, and cash equivalents and short-term investments. Cash and cash equivalents are deposited with a federally insured commercial bank in the United States.

The Company performs ongoing credit evaluations of its customers and generally does not require collateral and analyzes the need for reserves for potential credit losses and records reserves when necessary. In 2003 and 2002, the Company reduced its reserve for bad debt by approximately $0 in 2003 and $17,000 in 2002.

The Company’s customer base consists of businesses located primarily in North America. The Company maintains allowances for potential credit losses and historically, such losses have been within management’s

expectations. Revenue and accounts receivable by customers comprising more than 10% of total amounts are as follows:

In 2001, several class action lawsuits, including one derivative suit, were filed and served on the Company alleging that the Company and certain individuals made false and misleading statements concerning our business model and earnings for fiscal 2000. These lawsuits have been consolidated as In re Ventro Corp. Sec. Litigation, Master File No. Civ. 01-1287 SBA. On March 31, 2003, the Court granted in part and denied in part motions to dismiss the consolidated complaint filed against the Company and other defendants. The plaintiffs filed an amended complaint May 15, 2003. On July 14, 2003 the Company, the individual defendants and the underwriter defendants filed motions to dismiss certain allegations of the amended complaint. On October 14, 2003 the Court heard oral argument on the motions, and granted the motion of the Company and the individual defendants and granted in part and denied in part the motion of the underwriter defendants. Plaintiffs were given leave to amend their complaint. On November 26, 2003, plaintiffs filed an amended complaint. On December 19, 2003 the Company, the individual defendants and the underwriter defendants filed motions to dismiss new allegations added in the amended complaint. On January 23, 2004 the Court heard oral argument on the motions, and granted the motion of the Company, the individual defendants, and the underwriter defendants to dismiss the new allegations with prejudice. The Court has set a trial date for January 20, 2005 with respect to the remaining issues.

The Company is also a defendant in the initial public offering class action suits filed against issuers and the investment banks alleging that the offering documents were false and misleading. In June 2003, a memorandum of understanding was entered into by and among the plaintiffs, liaison counsel for the issuer defendants and counsel for the insurers which would result in dismissal of the action against the issuers, including the Company, on terms that would not require any current payment by the Company and are believed by the Company’s board of directors to carry only a remote risk that any future payment by the Company would be required. In addition, the plaintiffs would release the Company and its officers and directors from the claims that have been asserted against them as a part of the proposed settlement. On June 30, 2003, the Company’s board of directors approved the memorandum of understanding and authorized the Company to enter into the proposed settlement. The memorandum of understanding and proposed settlement are expected to be submitted to the Court for its required approval shortly.

Although we believe that we have meritorious defenses to the actions and intend to defend the suits vigorously, we cannot predict with certainty the outcome of these lawsuits. Our defense against such lawsuits could be costly and will require a significant commitment of time and resources by our senior management. Although the Company has insurance to cover these claims, the recovery of all future costs is not assured.

matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Contracts with Promedix and Chemdex customers and suppliers contained, in some cases, cancellation notification periods longer than the Company provided. In some cases, shorter notification periods caused inconvenience to customers and suppliers, and the Company has been notified by several suppliers that discontinuing the marketplace represents a breach of Promedix contractual obligations. Additionally, two customers of Chemdex have informed the Company that they did not receive notice of the termination of their contracts within the contractually required time period. However, as of December 31, 2003, no customer or supplier of Promedix or Chemdex had filed a formal complaint with the Company.

In addition to regulations applicable to businesses generally, the Company is or may be subject to direct regulation by governmental agencies which includes numerous laws and regulations generally applicable to the chemical, pharmaceutical, controlled substances, human and biological reagents, medical and in vitro devices, nuclear chemical businesses and environmental spills, as well as U.S. import and export controls and import controls of other countries. While the shutdown of Chemdex, Promedix and SpecialtyMD may limit future regulatory and product liability risks, until all statutes of limitation have expired, certain legal risks will remain.

The Company relied on its suppliers to comply with applicable local, state and federal laws regarding the labeling and the dissemination of information on any products sold that may be hazardous or present a health threat to the user. If these suppliers have failed, or we have failed, to maintain the requisite records irrespective of the actions of the suppliers, or if either of us had failed to adequately comply with labeling and information dispensing requirements of local, state or federal laws, then the Company may be held legally responsible, since Company held title to these products, and could be subject to governmental penalties or fines, as well as private lawsuits to enforce these laws.

Finally, the Company has relied upon its suppliers to obtain appropriate approvals for products regulated by the FDA and to comply with the requirements relating to those approvals and products. The failure of suppliers to obtain or comply with those approvals, or the failure of the product advertising or labeling to be consistent with the FDA approval for the products, or other failures by the products themselves, or our failure to keep regulatory records required by the FDA, such as complaint files, could result in costly product recalls, significant fines and judgments, civil and criminal liabilities and negative publicity.

In February 2001, the Company received a subpoena from the U.S. Department of Justice, Drug Enforcement Administration, for certain billing, invoice, and shipping records concerning sales to an unaffiliated purchaser. Other than the foregoing, the Company is unaware of any current investigations, inquiries, citations, fines or allegations of violations or non-compliance relating to regulatory requirements pending by government agencies or by third parties against us. It is possible, however, that there may be such investigations or allegations that the Company is not aware of or future investigations or allegations. The risk that any noncompliance may be discovered in the future is currently unknown. Although any potential impact on the Company for noncompliance cannot currently be established, it could result in significant civil or criminal penalties, including monetary fines and injunctions, for noncompliance and negative publicity, and seriously harm our business, revenues, results of operations and financial condition.

The Company is operating in one segment, as a provider of collaborative solutions for business process automation. The Company’s Chemdex exchange, which sold life science research products to research scientists working in pharmaceutical and biotechnology companies and academic research institutions, and the Promedix exchange, which sold specialty medical products to healthcare professionals have been shut down, are classified as discontinued operations (Note 20) and are not reported as part of segment reporting.

In December 2000, the Company’s Board of Directors adopted a formal plan and announced the shut down of all business operations associated with the Company’s life sciences and specialty medical products marketplaces. The shutdown of Chemdex, Promedix and SpecialtyMD was completed March 31, 2001.

At December 31, 2002, accrued liabilities relating to discontinued operations amounted to approximately $336,000. This amount was comprised of accruals for estimated costs to settle lease and other contractual obligations. During 2003 the Company paid approximately $2,000 for liabilities relating to discontinued operations and reversed an accrual of $334,000 related to an estimated liability accrued upon the Company’s cancellation of a contract that had been part of operations discontinued in 2000 and which ceased functioning in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activities ceased and no actual charges had been, or are now expected to be, paid. At December 31, 2003 there was no remaining discontinued operations accrual.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 29, 2004.


	By:	/s/ TED DRYSDALE



	Ted Drysdale
	President, Chief Executive Officer
	and Chairman of the Board

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


(1)	Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Registration Statement on Form S-1 filed with the Commission on March 6, 2000. (File No. 333-31774)

(2)	Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2001.

(3)	Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit Registrant’s Current Report on Form 8-K filed with the Commission on February 8, 2002.

(4)	Incorporated by reference to the corresponding Exhibit filed as an Exhibit to Registrant’s Annual Report on Form 10-K filed with the Commission on February 25, 2002.

(5)	Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Registration Statement on Form S-1 (File No. 333-78505) filed with the Commission on May 14, 1999, as amended, which Registration Statement was declared effective July 26, 1999.

(6)	Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Annual Report on Form 10-K filed with the Commission on February 26, 2001.

(7)	Incorporated by reference to the corresponding Exhibit filed as an Exhibit to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 1, 2002.

(8)	Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2001.

(9)	Incorporated by reference to the corresponding Exhibit filed as an Exhibit to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2002.


(10)	Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant’s Annual Report on Form 10-K filed with the Commission on March 18, 2003.


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 19341933

		For the fiscal year ended December 31, 2003

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 19341934

		For the transition period from to .


Delaware		77-0465496
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)


		Page

PART I
Item 1	Business		1
Item 2	Properties		5
Item 3	Legal Proceedings		5
Item 4	Submission of Matters to a Vote of Security Holders		6
PART II
Item 5	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		6
Item 6	Selected Financial Data		7
Item 7	Management’s Discussion and Analysis of Financial Condition and Result of Operations		8
Item 7A	Quantitative and Qualitative Disclosure About Market Risk		24
Item 8	Financial Statements and Supplementary Data		24
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		24
Item 9A	Controls and Procedures		24
PART III
Item 10	Directors and Executive Officers of the Registrant		25
Item 11	Executive Compensation		25
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		25
Item 13	Certain Relationships and Related Transactions		25
Item 14	Principal Auditor Fees and Services		25
PART IV
Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K		26
	Signatures		59
	Certifications
	Exhibit Index		60
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1



		Common Stock Price


		2003				2002

		High		Low		High		Low

(Price Range of Common Stock)
	Fourth Quarter	$	2.84	$	1.15	$	2.95	$	1.34
	Third Quarter	$	3.40	$	2.65	$	4.58	$	1.68
	Second Quarter	$	4.20	$	2.77	$	7.25	$	3.40
	First Quarter	$	4.14	$	1.30	$	6.60	$	3.90



	December 31,

	2003			2002			2001		2000			1999


	(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues	$	3,489		$	2,802		$	1,042	$	—		$	—
Income (loss) from continuing operations	$	(14,876	)	$	(29,446	)	$	80,432	$	(93,536	)	$	(5,421	)
Gain (loss) from discontinued operations	$	334		$	—		$	—	$	(524,561	)	$	(43,152	)
Net income (loss)	$	(14,542	)	$	(29,446	)	$	80,432	$	(618,097	)	$	(48,573	)

Basic income (loss) per share from continuing operations	$	(4.60	)	$	(9.21	)	$	26.11	$	(32.40	)	$	(5.25	)
Basic gain (loss) per share from discontinued operations	$	0.10		$	—		$	—	$	(181.73	)	$	(42.30	)
Basic net income (loss) per share	$	(4.50	)	$	(9.21	)	$	26.11	$	(214.13	)	$	(47.55	)

Diluted income (loss) per share from continuing operations	$	(4.60	)	$	(9.21	)	$	25.91	$	(32.40	)	$	(5.25	)
Diluted gain (loss) per share from discontinued operations	$	0.10		$	—		$	—	$	(181.73	)	$	(42.30	)
Diluted net income (loss) per share	$	(4.50	)	$	(9.21	)	$	25.91	$	(214.13	)	$	(47.55	)

Weighted average common shares outstanding — basic		3,232			3,196			3,081		2,887			1,021
Weighted average common shares outstanding — diluted		3,232			3,196			3,104		2,887			1,021


Name	Age		Position

Ted Drysdale		55	President, Chief Executive Officer and Chairman of the Board of Directors
Jerome Natoli		41	Chief Financial Officer
Raj Tolani		44	Vice President, Engineering
John Lynch		37	Senior Vice President, Sales and Services


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


Item 5.	*Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities*



	As of December 31,

	2003			2002		2001		2000			1999


	(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	5,991		$	10,275	$	21,715	$	192,022		$	103,095
Working capital	$	4,023		$	8,120	$	15,792	$	158,352		$	82,130
Total assets	$	7,913		$	23,004	$	52,625	$	257,308		$	163,933
Long term obligations	$	11,843		$	11,843	$	8,803	$	250,206		$	494
Total liabilities	$	15,237		$	16,070	$	17,182	$	304,381		$	38,914
Total stockholders’ equity (deficit)	$	(7,324	)	$	6,934	$	35,443	$	(47,073	)	$	125,019


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



	Payments Due By Period

			Less Than						After
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years

Long-term debt	$	11,843	$	—	$	11,843	$	—	$	—
Hosting agreement		76		76		—		—		—
Capital (finance) lease		—		—		—		—		—
Purchase obligations		—		—		—		—		—
Other long-term-liabilities		—		—		—		—		—
Operating leases		642		208		434		—		—

Total contractual obligations	$	12,561	$	284	$	12,277	$	—	$	—


	*Our Common Stock is not Listed on an Exchange or the Nasdaq System, and Trading is Restricted by the Additional Regulations on the Sale of Penny Stocks*


	*We Have a Limited Operating History and an Evolving Technology and Service Offering, Which Makes it Difficult to Evaluate Our Future Prospects*


	*We Are Dependent on a Small Number of Customers in a Limited Number of Industries*


	*Our Business Involves a Lengthy and Unpredictable Sales Cycle*


Item 1.	*Business*


Item 2.	*Properties*


Item 3.	*Legal Proceedings*


Item 6.	*Selected Financial Data*


	Legislative Actions, Higher Insurance Costs and Potential New Accounting Pronouncements May Cause our General and Administrative Expenses to Increase and Impact our Future Financial Position and Results of Operations


	*Security Risks and Concerns May Decrease the Demand for Our Services, and Security Breaches May Disrupt Our Services or Make Them Inaccessible to Our Customers*


	*Adopting a Business Model That Includes the Sale of Perpetual Licenses to our Software Products May Not Result in Continued Immediate Recognition of License Revenue*


	*We May Not Be Able to Sustain VSOE and May Not be Able to Use the Residual Method*


	*Our Products May Contain Defects That Could Harm Our Reputation, Be Costly to Correct, Delay Revenue and Expose Us to Litigation*


	*Our Operating Results Fluctuate Significantly from Quarter-to-Quarter*


	Our Operating Results Are Highly Dependent on License and Service Revenues from Our Software Suite, and Our Business Could Be Materially Harmed by Factors That Adversely Affect the Pricing and Demand for This Software Suite


	*The Company Has a History of Losses and Expects to Continue to Incur Significant Operating Losses and Negative Cash Flow; We May Never Achieve or Maintain Profitability*


	*We Operate in a Highly Competitive Market and Our Inability to Compete Successfully Against New Entrants and Established Companies Could Adversely Affect Our Market Share*


	*We Are Dependent Upon Outsourcing Providers for Provision of the Hosted Environment for our Customers; Connection and Performance Issues Have Occurred and May Recur*


	*Our Financial Performance and Workforce Reductions May Adversely Affect the Morale and Performance of Our Personnel and Our Ability to Hire New Personnel*


	*Our Business Will Suffer If We Do Not Enhance Our Product or Introduce New Features to Meet Changing Customer Requirements*


	*We Are Dependent on Intellectual Property and on Products Licensed or Purchased from Third Parties and are Exposed to Legal Liability for Infringement*


	*Non-Compliance with Government Regulations May Subject Us to Liability*


	*Government Contracts and Compliance With Government Regulations May Subject Us to Increased Administrative Burdens and Risks That May Increase the Cost of Doing Business*


	*We Face Risks Associated With Stockholder and Bondholder Litigation*


	*General Economic and Political Conditions May Impact Our Results*


	*Our Common Stock Price is Especially Volatile, Which Could Result in Substantial Losses to Investors*


Item 7A.	*Qualitative and Quantitative Disclosure about Market Risk*


Item 8.	*Financial Statements and Supplementary Data*