PART I - FINANCIAL INFORMATION (UNAUDITED)

Item 1: Financial Statements

VASTERA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2004			December 31, 2003
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	19,527		$	16,046
Short-term investments	36,087			40,402
Accounts receivable, net of allowance for doubtful accounts of $1,111 and $994, respectively	18,584			17,599
Prepaid expenses and other current assets	4,252			4,212
Total current assets	78,450			78,259
Property and equipment, net	9,542			10,806
Intangible assets, net	1,033			1,863
Goodwill	5,044			5,044
Deposits and other assets	964			1,292

Total assets	$	95,033		$	97,264

Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit and capital lease obligations, current	$	745		$	1,867
Accounts payable	916			921
Accrued expenses	6,721			5,260
Accrued compensation and benefits	3,700			3,452
Deferred revenue, current	11,220			9,451
Total current liabilities	23,302			20,951
Long-term liabilities:
Line of credit and capital lease obligations, net of current portion	149			698
Deferred revenue, net of current portion	1,330			2,393
Total liabilities	24,781			24,042
Commitments and contingencies (See Note 6)

Stockholders’ equity:
Common stock, $0.01 par value; 100,000 shares authorized; 42,023 and 41,745 shares issued and outstanding, respectively	420			417
Additional paid-in capital	328,101			327,234
Accumulated other comprehensive loss	(1,021		)	(715		)
Deferred compensation	—			(46		)
Accumulated deficit	(257,248		)	(253,668		)

Total stockholders’ equity	70,252			73,222
Total liabilities and stockholders’ equity	$	95,033		$	97,264

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

VASTERA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues:
Managed services revenues	$	13,740		$	14,084		$	41,920		$	41,343
Software revenues	2,639			2,936			7,344			8,552
Services revenues	5,432			4,675			14,664			14,268
Total revenues	21,811			21,695			63,928			64,163

Cost of revenues:
Cost of managed services revenues	8,403			7,553			24,557			22,488
Cost of software revenues	758			716			2,116			2,110
Cost of services revenues	3,828			3,421			10,822			10,427

Operating expenses:
Sales and marketing	2,531			2,290			7,461			6,836
Research and development	3,187			2,954			9,211			8,990
General and administrative	2,922			2,663			8,699			8,136
Depreciation	1,353			1,281			4,065			3,845
Intangible amortization expense	135			719			612			2,106
Stock-based compensation	—			189			46			834
Total operating expenses	10,128			10,096			30,094			30,747

Loss from operations	(1,306		)	(91		)	(3,661		)	(1,609		)
Other income, net	168			112			364			448
Loss before income taxes	(1,138		)	21			(3,297		)	(1,161		)
Income taxes	(55		)	(150		)	(283		)	(458		)

Net loss	$	(1,193	)	$	(129	)	$	(3,580	)	$	(1,619	)

Basic and diluted net loss per common share	$	(0.03	)	$	(0.00	)	$	(0.09	)	$	(0.04	)

Weighted-average common shares outstanding	42,009			41,374			41,834			40,944

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

VASTERA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(3,580	)	$	(1,619	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation	46			834
Depreciation and intangible amortization expense	4,677			5,951
Provision for allowance for doubtful accounts	454			171
Amortization of revenue discounts related to customer contracts	230			235
Amortization of capitalized internal-use software costs	545			335
Asset disposal	96			—
Changes in operating assets and liabilities:
Accounts receivable	(1,426		)	(1,056		)
Prepaid expenses and other current assets	(146		)	(1,067		)
Deposits and other assets	449			(602		)
Accounts payable and accrued expenses	1,368			(5,856		)
Accrued compensation and benefits	270			1,833
Deferred revenue	759			(112		)
Net cash provided by (used in) operating activities	3,742			(953		)

Cash flows from investing activities:
Acquisition of subsidiaries	—			(3,000		)
Net (purchases) sales of short-term investments	4,168			457
Acquisition of property and equipment	(3,330		)	(2,208		)
Net cash provided by (used in) investing activities	838			(4,751		)

Cash flows from financing activities:
Proceeds from the exercise of stock options and issuance of stock for the employee stock purchase plan	870			3,147
Principal payments on long-term debt	(1,671		)	(2,027		)
Proceeds from equipment line of credit	—			1,102
Net cash provided by (used in) financing activities	(801		)	2,222
Effect of foreign currency exchange rate changes on cash and cash equivalents	(298		)	180
Net increase (decrease) in cash and cash equivalents	3,481			(3,302		)
Cash and cash equivalents, beginning of period	16,046			23,696
Cash and cash equivalents, end of period	$	19,527		$	20,394

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

VASTERA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Nature of Business:

The accompanying unaudited condensed consolidated financial statements of Vastera, Inc. and its subsidiaries (“Vastera” the “Company,” “we,” or “us”) have been prepared on the same basis as audited financial statements and include all adjustments, including all normal recurring adjustments that are necessary for a fair presentation of the financial condition, results of operations, and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2004. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission’s (the “SEC”) rules and regulations. The Company’s interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto, as filed with the SEC with the Company’s Annual Report on Form 10-K and other reports filed with the SEC.

Vastera is a leading provider of solutions for Global Trade Management and was incorporated in Virginia in November 1991 under the name Export Software International, Inc. The Company reincorporated in Delaware in July 1996 and changed its name to Vastera, Inc. in June 1997. The Company’s principal solutions offerings include software solutions, Trade Management Consulting, and Managed Services. Managed Services range from management of a client’s specific global trade function to providing complete management of a client’s global trade operations. The Company has operations in the United States, Belgium, Brazil, Canada, China, France, Germany, Ireland, Japan, Mexico, the Netherlands, Poland, Spain, and the United Kingdom.

The Company’s operations are subject to certain risks and uncertainties, including among others, uncertainties relating to product development, rapidly changing technology, current and potential competitors with greater financial, technological, production, and marketing resources, the potential loss of significant customers, dependence on key management personnel, limited protection of intellectual property and proprietary rights, uncertainty of future profitability and possible fluctuations in financial results.

2. Summary of Significant Accounting Policies:

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are most susceptible to change are the Company’s estimates of collections of accounts receivable and the estimated lives and the realization of its internal use software and intangible assets.

Revenue Recognition

The Company’s revenues consist of managed services revenues, software revenues, and services revenues.

Managed Services Revenues

Managed services revenues are derived from agreements that provide for transaction or services fees based on the performance and delivery of the Company’s Managed Services solutions. Managed Services solutions include the processing of the Company’s clients’ customs and shipment entries and the classifying of clients’ goods. Managed Services transaction arrangements are often subject to annual or quarterly minimum transaction thresholds and revenues are recognized based on the lower of the cumulative actual transactions processed using a weighted-average transaction rate or the cumulative amount billable. For those Managed Services transaction arrangements subject to annual minimums and for those arrangements where the amount billable for interim periods is limited to the pro-rata portion of the annual minimum, transactions processed in excess of the minimum in each period are not billable, and, therefore, revenue is not recognized until the end of the related year. Certain Managed Services arrangements are based upon a fixed services fee. Revenues associated with these arrangements are recognized ratably over the term of the arrangement and limited to the amounts billable. In addition, the Company may receive annual gainsharing fees under certain Managed Services arrangements based on a percentage of the clients’ annual cost savings, as defined in those Managed Services arrangements. These gainsharing fees are recognized when they become fixed and determinable.

Software Revenues

Software revenues consist of term license revenues, perpetual software license revenues, and transaction-based revenues. The Company recognizes revenue from the sale of software products in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition.

Term license revenues are derived from term software license arrangements in which the Company’s clients license its software products and obtain the right to unspecified enhancements on a when-and-if-available basis, ongoing support and content update services. Content updates are significant and frequent. Revenues are recognized ratably over the contract term. Term license arrangements typically range from three to five years. To the extent the Company hosts the software for its customers, the hosting fee is recognized ratably over the contract period in conjunction with the recognition of the license fee.

Perpetual software license revenues are derived from perpetual software license arrangements and related maintenance contracts. Maintenance contracts include the right to unspecified enhancements on a when-and-if available basis, ongoing support, and content update services. The content updates provided under maintenance arrangements are significant and frequent, and, as a result, revenues from perpetual software license sales are recognized ratably over the estimated economic life of the product. The Company has estimated that the life of the product is three years, which is consistent with the historical periods between major upgrades to the functionality and architecture of its products. Revenues from maintenance contracts are recognized ratably over the contract term, which is typically one year. To the extent the Company hosts the software for its customers, the hosting fee is recognized ratably over the contract period in conjunction with the recognition of the license fee.

Transaction-based revenues are derived from arrangements that provide for transaction fees based on a client’s usage of the Company’s software products. Revenues from the usage of its software products are recognized as transactions occur.

The Company recognizes revenues from arrangements with resellers beginning when the software product is sold to the end user. Any annual transaction minimums not sold by the reseller to the end customers are recognized as revenues upon the expiration of the annual minimum period.

Services Revenues

Services revenues are derived from software implementation, Trade Management Consulting, and training services. Services are performed on a time and materials basis or under fixed price arrangements. Revenues on time and materials contracts are recognized based on fixed billable rates for hours delivered, and revenues on fixed priced contracts and are recognized as the services are performed, using the percentage of completion method of accounting based on the ratio of costs incurred to total estimated costs to be incurred. Losses on fixed price arrangements are recognized when known.

For multiple-element arrangements where the Company provides both software and services, the Company defers the service fee, based on vendor-specific objective evidence, and recognize it as the services are performed.

Deferred Revenues

Deferred revenues include amounts billed to clients for revenues that have not been recognized and generally result from billed, but deferred license revenues and services not yet performed. Deferred revenues are recognized over the term of the agreement, the remaining economic life of the product, or when the services are performed.

Cost of Revenues

Cost of revenues includes the cost of managed services revenues, the cost of software revenues, and the cost of services revenues.

Cost of managed services revenues consist of the cost of salaries and related expenses, reimbursed expenses to Ford for our Managed Services organization, and the amortization of capitalized internal use software costs related to the implementation and integration of the Company’s trade management platform to the Managed Services operation.

Cost of software revenues includes royalties owed to third parties for technology products integrated into the Company’s software products, as well as the cost of salaries and related expenses for the software customer support organization.

Cost of services revenues includes the cost of salaries and related expenses for implementation, management consulting and training services provided to clients, as well as the cost of third parties contracted to provide either implementation services or Trade Management Consulting to the Company’s clients.

Internal Use Software

In accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalizes costs associated with the implementation and integration of its trade management platform to its Managed Services operations. The Company capitalized approximately $253,000 and $111,000 of direct labor costs in the third quarters of 2004 and 2003, respectively, and $619,000 and $395,000 in the nine months ended September 30, 2004 and 2003, respectively, related to certain capitalizable tasks including the technical design, system configuration and testing phases of the integration process. Judgment is involved in determining which development tasks associated with the platform integration are capitalizable pursuant to SOP 98-1. These costs are amortized as costs of managed services revenues over three years and amortization commences upon the completion of the integration to the Vastera platform. Total amortization expense in the three months and nine months ended September 30, 2004 was approximately $209,000 and $545,000, respectively. Total amortization expense in the three months and nine months ended September 30, 2003 was approximately $115,000 and $335,000, respectively. Net capitalized costs as of September 30, 2004 and December 31, 2003 was approximately $1.8 million and $1.7 million, respectively.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, and accounts receivable. The Company limits the amount of investment exposure in any one financial instrument and does not have any foreign currency investments. The Company sells products and services to customers across several industries throughout the world without requiring collateral. However, the Company routinely assesses the financial strength of its customers and maintains allowances for anticipated losses.

As of September 30, 2004 and December 31, 2003, Ford Motor Company accounted for 26% and 25%, respectively, of total accounts receivable. As of September 30, 2004 and December 31, 2003, Lucent Technologies accounted for 12% and 7%, respectively, of total accounts receivable.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share includes the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. As of September 30, 2004 and December 31, 2003, options to purchase approximately 7,645,000 and 8,436,000 shares of common stock were outstanding, respectively. Due to the anti-dilutive effect of the options, they have been excluded from the calculation of weighted-average shares for diluted earnings per share. As a result, the basic and diluted loss per share amounts are identical.

Comprehensive Income (Loss)

As of September 30, 2004 and December 31, 2003, accumulated other comprehensive loss includes unrealized gains and losses on investments and foreign currency translation adjustments. As of September 30, 2004 and December 31, 2003, accumulated net unrealized (loss) gain on available for sale investments was approximately $(40,000) and $107,000, respectively. As of September 30, 2004 and December 31, 2003, accumulated foreign currency translation adjustment was a loss of approximately $981,000 and $822,000, respectively.

Goodwill and Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Company’s assessment date is December 31 each year. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

Intangible assets are amortized on a straight-line basis over their expected economic life, generally one to five years. The value assigned to the Ford and GE contracts in connection with the Ford and GE acquisitions are being amortized as a discount to revenue over the minimum terms of the contracts.

Stock Options

The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. The

Company applies Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its Plans. No options with exercise prices that were less than fair value were granted during the nine months ended September 30, 2004 and 2003. The Company had deferred compensation balances from options issued prior to 2001. The deferred compensation was recognized over the vesting period of the related options using an accelerated method. The Company recognized compensation expense during the first nine months of 2004 and 2003 of approximately $46,000 and $834,000, respectively. As of September 30, 2004, all deferred compensation has been recognized.

Had compensation expense for the Company’s 1996 Plan, 2000 Plan and Employee Stock Purchase Plan been determined based on the fair value at the grant dates for awards under the Plans consistent with the method of SFAS No. 123, the Company’s net loss would have been increased to the pro forma amounts indicated below (in thousands, except per share data).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003

Net loss applicable to common stockholders, as reported	$	(1,193	)	$	(129	)	$	(3,580	)	$	(1,619	)
Add: stock-based compensation included in net loss, net of tax	—			189			46			834
Deduct: stock-based compensation determined under the fair value method for all awards, net of tax	(1,466		)	(1,870		)	(6,375		)	(13,510		)
Net loss, pro forma	$	(2,659	)	$	(1,810	)	$	(9,909	)	$	(14,295	)
Pro forma net loss per common share	$	(0.06	)	$	(0.04	)	$	(0.24	)	$	(0.35	)

Income Taxes

Deferred taxes are provided utilizing the asset and liability method as prescribed by SFAS No. 109, Accounting for Income Taxes, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

3. Restructuring

During 2002, the Company recorded restructuring costs of approximately $1.1 million associated with the termination of employees and approximately $2.2 million associated with the closing of redundant facilities, the cancellation of certain contracts, and other non-personnel related actions.

As of September 30, 2004 and December 31, 2003, the balance of the restructuring reserve was approximately $22,000 and $112,000, respectively. The Company paid approximately $30,000 and $137,000 of these costs during the third quarters of 2004 and 2003, respectively. The Company paid approximately $90,000 and $714,000 of these costs during the nine months ended September 30, 2004 and 2003, respectively. The Company expects to pay out the remainder of the restructuring reserve in 2004.

4. Acquisitions

On June 19, 2003, the Company acquired General Electric Company’s (“GE”) internal U.S. customs operations. The Company also entered into a managed services agreement under which Vastera will manage the U.S. customs operations for five of GE’s US divisions for a minimum term of 3 years. The purchase method of accounting has been applied to this acquisition, and accordingly, the results of GE’s internal US customs operations are included in the Company’s operations beginning July 1, 2003, the effective date of the acquisition.

In exchange for its internal US customs operations, GE received $3.0 million in cash and 51,046 shares of the Company’s common stock valued at approximately $312,000. The purchase price, including transaction costs of approximately $62,000, has been allocated based on fair values as follows (in thousands):

	Value

Prepaid expenses	$	126
Property and equipment	150
Acquired technology and know-how	1,000
GE contract and customer relationship	200
Goodwill	1,898
	$	3,374

Beginning July 1, 2003, the amount allocated to the acquired technology and know-how intangible is being amortized on a straight-line basis over five years, the estimated useful life of the asset. Beginning July 1, 2003, the amount allocated to the GE contract and customer relationship is being amortized as a discount to revenue over five years, the estimated useful life of the asset.

5. Long-Term Debt:

Lines of Credit

The Company has a term loan, a secured revolving line of credit (Line of Credit) and an equipment line of credit (Equipment Line of Credit) with Comerica Bank.

The Company paid the remaining term loan balance during 2004. The balance under the term loan was zero and approximately $1.0 million as of September 30, 2004 and December 31, 2003, respectively.

The Company may borrow up to $10.0 million under the Line of Credit, with a $2.5 million sub-limit for the issuance of letters of credit. Advances under the Line of Credit are limited to the lesser of $10 million or 80% of eligible accounts receivable, as defined in the loan agreement. The Line of Credit bears interest at the bank’s prime rate (4.75% as of September 30, 2004). The Line of Credit matured in July 2004. There were no outstanding balances under the Line of Credit as of December 31, 2003.

In the first and third quarters of 2003, the Company borrowed approximately $614,000 and $488,000, respectively, against the Equipment Line of Credit. The availability under the Equipment Line of Credit expired in July 2003. Commencing on July 31, 2003, interest and principal began to be payable in monthly installments on all borrowings made under the Equipment Line of Credit.

In July 2004, the Company renewed its existing Line of Credit for $10 million, with a $2.5 million sub-limit for the issuance of letters of credit, and a new equipment line of credit for $5 million with Comerica Bank. The renewed Line of Credit will mature in July 2006 and the renewed equipment line of credit will mature three years from the date of the general equipment or software purchases. The outstanding balance and current portion of balance under the Equipment Line of Credit was approximately $430,000 as of September 30, 2004, and $796,000 and $490,000, respectively, as of December 31, 2003. The renewed Equipment Line of Credit has two interest-only payment periods and bears interest at the bank’s prime rate plus 50 basis points (5.25% as of September 30, 2004).

The terms of the renewed Line of Credit and the renewed Equipment Line of Credit require the Company to comply with several financial covenants, including restrictions and limitations on future indebtedness, sale of assets and material changes in the Company’s business. Through September 30, 2004, the Company was in compliance with the covenants of the its credit facility.

Capital Lease Obligations and Other

The Company leases office equipment under various non-cancelable capital leases. Amounts borrowed under the equipment leasing arrangement are due over 36- to 48-month repayment periods. As of September 30, 2004 and December 31, 2003, capital lease obligations outstanding were approximately $464,000 and $764,000, respectively. Approximately $315,000 and $372,000 of the capital lease obligation balance was current as of September 30, 2004 and December 31, 2003, respectively. Property and equipment includes approximately $925,000 of equipment under capital lease arrangements at September 30, 2004 and December 31, 2003. Related accumulated depreciation was approximately $478,000 and $247,000 at September 30, 2004 and December 31, 2003, respectively.

As of December 31, 2002, the Company had a note payable outstanding of approximately $120,000 due to a third party

The following table summarizes the Company’s three segments (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues:
Managed services	$	13,740		$	14,084		$	41,920		$	41,343
Software	2,639			2,936			7,344			8,552
Services	5,432			4,675			14,664			14,268
Total revenues	21,811			21,695			63,928			64,163

Gross Profit:
Managed services	5,337			6,531			17,363			18,855
Software	1,881			2,220			5,228			6,442
Services	1,604			1,254			3,842			3,841
Gross profit	8,822			10,005			26,433			29,138

Net loss:
Unallocated expense	(10,128		)	(10,096		)	(30,094		)	(30,747		)
Interest income	182			158			480			591
Interest and other expense	(14		)	(46		)	(116		)	(143		)
Income tax	(55		)	(150		)	(283		)	(458		)
Net loss	$	(1,193	)	$	(129	)	$	(3,580	)	$	(1,619	)

Geographic Information

The Company sells its products and services through its offices in the United States, Brazil, Canada, Mexico, Germany, Japan, and the United Kingdom. Information regarding revenues and long-lived assets attributable to the United States and to all foreign countries is stated below. The geographic classification of product and services revenues was based upon the location of the customer. The Company’s product and services revenues were generated in the following geographic regions (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
United States	$	16,414	$	15,970	$	48,522	$	47,720
Other North America	2,369		2,547		6,864		7,253
Europe	1,927		1,876		6,326		5,705
Other international regions	1,101		1,302		2,216		3,485
Total revenues	$	21,811	$	21,695	$	63,928	$	64,163

The Company’s tangible long-lived assets were located as follows (in thousands):

	September 30, 2004		December 31, 2003
	(unaudited)
United States	$	8,045	$	9,590
Other North America	656		826
Europe	546		202
Other international locations	295		188
Total long-lived assets	$	9,542	$	10,806

Significant Customers

For the quarters ended September 30, 2004 and 2003, the Company derived approximately 60% and 65%, respectively, of its total revenues from the Company’s top five customers. For the nine months ended September 30, 2004 and 2003, the Company derived approximately 63% and 66%, respectively, of its total revenues from the Company’s top five customers. For the quarters ended September 30, 2004 and 2003, Ford accounted for 30% of total revenues. For the nine months ended September 30, 2004 and 2003, Ford accounted for 30% of total revenues. For the quarters ended September 30, 2004 and 2003, Lucent accounted for 12% and 14% of total revenues respectively. For the nine months ended September 30, 2004 and 2003, Lucent accounted for 13% and 15% of

total revenues respectively.

8. Transactions with Ford Motor Company:

On August 29, 2000, the Company acquired Ford’s global customs import operations and merged Ford’s global customs import operations into its Managed Services operations. Ford received 8,000,000 shares of the Company’s common stock valued at approximately $79.2 million in consideration at the time of the transaction. As of September 30, 2004, Ford owned 8,000,000 shares or approximately 19% of the Company.

In August 2000, the Company also entered into a Managed Services agreement under which Vastera manages Ford’s global trade import operations. In January 2001 and March 2001, the Company entered into Managed Services agreements with Ford Mexico and Ford Canada, respectively. In November 2002, the Company entered into a Managed Services agreement with Ford Europe to manage operations in the United Kingdom, Spain, Belgium, and Germany. The agreements with Ford have initially had minimum terms of four years.

In July 2002, the Company amended its agreement with Ford U.S. to provide for billing Ford at a fixed annual rate of $11.8 million for the remaining life of the agreement, beginning January 1, 2003. Either party may terminate this agreement for convenience commencing on August 1, 2004, after providing the non-terminating party one-year advance notice. Commencing on August 1, 2005 and continuing thereafter, either party may terminate the agreement upon providing six-months’ advance written notice. Ford U.S. has not informed the Company that they plan to terminate the agreement. The Company is currently reviewing with Ford U.S. the scope of services it performs and the associated fees charged for these services. As part of this review, effective June 1, 2004, the Company has agreed to reduce the managed services fees charged to Ford U.S. by approximately $500,000 on an annual basis.

For the quarters ended September 30, 2004 and 2003, Ford accounted for 30%, of total revenues. For the nine months ended September 30, 2004 and 2003, Ford accounted for 30% of total revenues. As of September 30, 2004 and December 31, 2003, Ford accounted for 26% and 25%, respectively, of total accounts receivable.

The Company reimburses Ford for expenses incurred by Ford for the use of its facilities, the costs of leased employees, and the maintenance and expenses related to the acquired technology. For the quarters ended September 30, 2004 and 2003, Ford charged the Company approximately $900,000 and $1.2 million, respectively. For the nine months ended September 30, 2004 and 2003, Ford charged the Company approximately $3.0 million and $5.1 million, respectively. In 2003, these payments began to decrease as the Company began deploying its own technology in North America.

9. Stock-based Compensation

In October 2002, the Company offered each eligible employee an opportunity to cancel certain of his or her stock options (the “Options Exchange”) in exchange for the right to receive a future stock option grant for the same number of shares six months and one day from the date of cancellation with a strike price equal to the market price on the new grant date. Options to purchase approximately 3.8 million shares were cancelled pursuant to the Options Exchange. In April 2003, the Company issued replacement options to employees to purchase approximately 3.6 million shares of common stock at an exercise price of $4.06 per share in exchange for the options previously canceled. The vesting schedule of the canceled options remained in effect for the replacement options. The Company deferred the issuance of annual option grants to employees during this six-month period and accordingly, in April 2003, the Company issued additional options to purchase 930,000 shares of common stock to these employees at an exercise price of $4.06 per share.

The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for it stock option plan. The Company recorded deferred compensation cost of approximately $6.4 million in the last nine months of 1999 and approximately $13.4 million in the first nine months of 2000. On March 29, 2001, the Company also recorded approximately $465,000 of deferred compensation in connection with the issuance of options to acquire 64,000 shares of its common stock in exchange for the unvested Speedchain stock options it assumed in the related business combination. These deferred compensation amounts represent the aggregate difference between the exercise price and the fair value for accounting purposes of the underlying shares of common stock at the date of grant. This amount is included as a component of stockholders’ equity and is being amortized on an accelerated basis over the applicable vesting period. Stock-based compensation, which has been separately identified in the accompanying condensed consolidated statement of operations, has not been included in costs of revenues, sales and marketing, research and development, and general and administrative expense as indicated below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Cost of managed services revenues	$	—	$	5	$	1	$	23
Cost of software revenues	—		1		—		4
Cost of services revenues	—		26		6		117
Sales and marketing	—		76		19		334
Research and development	—		18		4		81
General and administrative	—		63		16		275
Total stock-based compensation	$	—	$	189	$	46	$	834

10. Supplemental Information:

Cash Flow Information

Cash paid for interest was approximately $79,000 and $120,000 for the nine months ended September 30, 2004 and 2003, respectively. Noncash activities were as follows (in thousands):

	Nine Months Ended September 30,
	2004		2003
	(unaudited)		(unaudited)
Increase in capital lease obligations	$	—	$	921
Issuance of common stock and stock options in acquisitions	—		312
Assumed liabilities, transaction costs and other, net of tangible assets and deferred revenue acquired in acquisitions	—		(214		)

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Report, which are deemed to be incorporated into this section. Some of the statements we make in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements as expressed or implied by such forward-looking statements not to be achieved fully. These forward-looking statements relate to future events and our future financial performance. In some cases, you can identify forward-looking statements by words such as “may,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” and “continue,” or the negative of such terms or other comparable words. These statements are only predictions and included risks and uncertainties particularly those described in this Report under the caption “Risks Relating to Our Business.” Consequently, our actual results may differ materially from those expressed or implied by these forward-looking statements.

Overview

Vastera is the worldwide leader in solutions for Global Trade Management. We are an international company with a presence in 14 countries, serving an international client base that utilizes our solutions to manage trade worldwide. Our solutions have been designed to enable our clients to manage efficiently and effectively the information flows associated with the cross border movement of goods and comply with the myriad of rules and regulations to which global trade is subject.

Our solutions facilitate our clients’ abilities to manage the complexities and inefficiencies inherent in global trading in a manner that allows them to capitalize on the large, highly fragmented, and rapidly growing opportunity existing in the international market. We have three major product and services offerings, which are: TradeSphere Solutions; Trade Management Consulting; and Managed Services. The foundation upon which our product and services offerings are based is our collection of proprietary processes, data, rules, and regulations, which we call our Global Trade Content.

Global Trade Content is our proprietary rules-based application that provides comprehensive management of trade regulations and programs and it functions as the information repository for our entire suite of Global Trade Management solutions. TradeSphere Solutions is our suite of software solutions that helps manage critical trade processes, and provides visibility into shipment and carrier performance. Trade Management Consulting is our consulting services offering that applies our global trade expertise and our proprietary methodologies. Our consulting services range from performing opportunity and compliance assessments to implementing detailed strategic analyses designed to improve a client’s global trade practices. Managed Services is our business process outsourcing offering through which we combine our Global Trade Content, trade expertise, and technology to improve client regulatory compliance and reduce transaction processing costs. We offer Managed Services to address all or a portion of a client’s global trade operations, ranging from one or more specific global trade functions to providing a complete suite of Managed Services.

The potential market into which we offer our products and services is an expansive one. Our product and services offerings, however, are new to their targeted audience and the ultimate market size is difficult to quantify. While our offerings are critical to a company remaining compliant with import and export rules and regulations, generally our offerings are not core to the business needs of a company. This can often mean that the decision as to whether to purchase one of our solutions is predicated more on expected cost savings to be achieved by an entity than it is upon enhanced compliance. In 2001 and 2002, our sales cycle averaged approximately six to nine months for software sales and nine to 12 months for Managed Services sales. In 2003, however, we experienced a lengthening of these cycle times.

During the last seven quarters, we experienced a significant slowing in the rate at which we added new business, reflected by an extended average sales cycle and sales of Managed Services and software at lower than expected levels. Total revenues during this period demonstrated only modest growth, especially when compared to the revenue growth rates we experienced in 2001 and 2002. Total sales of Managed Services and software for 2003 and the first nine months of 2004 were lower than expected and considerably lower than what we achieved in the prior three years. We expect that our total 2004 revenues will be below our 2003 revenue level, and revenues in future periods may not increase above 2003 and 2004 levels until such time as we can accelerate the rate of our sales growth. We also expect our revenues in 2005 will decrease when compared to 2004.

In 2003, we implemented several expense reduction activities to help offset the lack of aggregate revenue growth and achieve profitability targets. We expected that these cost reduction actions would be short in duration. Moreover, we expected to return to normalized spending levels once new sales reached established targets. We did not, however, achieve our anticipated sales levels and, accordingly, the desired outcome was not achieved. The expense reduction actions taken in 2003 have slowed our progress in sales and marketing, product development and Managed Services operations. To satisfy customer expectations for product quality better, we increased spending on operating expenses in 2004, primarily in research and development and sales and marketing. Additionally, to serve our Managed Services customers better we increased spending on our Managed Services operations in 2004, which resulted in a reduction in managed services gross margins. These increased investments reduced our cash generated from operations and increased our net losses. We continually assess the level of investment in our business and we expect to decrease our level of investments over time, consistent with the needs of our changing market. We believe our level of investments in our business will be

one of the contributing factors to when we become profitable and generate cash.

We expect the gross margin in our Managed Services business to decline in the near term. The loss of the Visteon revenue in January 2005 will negatively impact our margin. Over the longer term, we expect to realize productivity improvements from our investment in our infrastructure. As we enter into large multi-year Managed Services agreements in new industry sectors or new geographic regions that require significant investments in the related infrastructure, the costs associated with these Managed Services agreements may be greater in the initial year, and in certain circumstances exceed the revenue recognized in the initial year, than in the later years, when we realize productivity improvements from these infrastructure investments. There is offsetting pressure to the anticipated productivity benefits from price pressure in our marketplace. In addition, our large managed services customers expect to share in the cost reductions achieved through our efficiency gains. Consequently, the long-term gross margins of our business are difficult to predict, but we expect them to be lower than those we anticipated when we first established our managed services business model.

Our management team is currently reviewing the level of investment we make in each of our product and services lines of business and geographic areas of presence. We are streamlining our product and services lines and consolidating and reorganizing our geographic locations and will continue doing so to align the level of our investments with the lower margin rates we anticipate achieving. In doing so, we anticipate incurring costs associated with exiting contractual relationships and terminating personnel. Although management does not currently believe such costs will be material, we cannot yet quantify them or the effects these actions may have on future revenues.

In July 2004, Visteon Corporation notified us that it will not renew its agreement for Managed Services when it expires on December 31, 2004. We have provided outsourced global trade management services to Visteon throughout North America since 2000. Vastera and Visteon are currently working through a transition period. We expect to recognize 2004 revenues of approximately $6 million associated with the Visteon contract. Additionally, revenue derived from other large customer contracts may change as we renew these contracts. We expect our revenue in 2005 will decrease when compared to 2004. We anticipate the amount of new business closed in 2004 will not offset the loss of the Visteon contract. If we also fail to reduce the expenses of our business to match lower revenues, our net losses may increase and our cash flows could be negatively impacted.

Relationship with Ford Motor Company

On August 29, 2000, we acquired Ford’s global customs import operations and merged Ford’s global customs import operations into our Managed Services operations. Ford received 8,000,000 shares of our common stock valued at approximately $79.2 million in consideration at the time of the transaction. As of September 30, 2004, Ford owned 8,000,000 shares or approximately 19% of our common stock.

In August 2000, we also entered into a Managed Services agreement under which we manage Ford’s global trade import operations. In January 2001 and March 2001, we entered into Managed Services agreements with Ford Mexico and Ford Canada, respectively. In November 2002, we entered into a Managed Services agreement with Ford Europe to manage operations in the United Kingdom, Spain, Belgium, and Germany. The agreements with Ford have initially had minimum terms of four years. Our agreement with Ford U.S. provides for billing Ford at a fixed annual rate of $11.8 million for the remaining life of the agreement, beginning January 1, 2003. Either party may terminate this agreement for convenience commencing on August 1, 2004, after providing the non-terminating party one-year advance notice. Commencing on August 1, 2005 and continuing thereafter, either party may terminate the agreement upon providing six-months’ advance written notice. Ford U.S. has not informed us they plan to terminate the agreement.

We are currently reviewing with Ford U.S. the scope of services we perform and the associated fees charged for these services. As part of this review, effective June 1, 2004, we agreed to reduce the managed services fees charged to Ford U.S. by approximately $500,000 on an annual basis. Additionally, in September 2004, we agreed with Ford to share some of the cost savings we obtain from achieving additional efficiencies in our European operations. We have agreed with Ford that it shall obtain the benefit of such cost savings in the form of reduced managed services fees if and when any such efficiencies are achieved.

For the quarters ended September 30, 2004 and 2003, Ford accounted for 30%, of total revenues. For the nine months ended September 30, 2004 and 2003, Ford accounted for 30% of our total revenues. As of September 30, 2004 and December 31, 2003, Ford accounted for 26% and 25%, respectively, of total accounts receivable.

We reimburse Ford for expenses incurred by Ford for the use of its facilities, the costs of leased employees, and the maintenance and expenses related to the acquired technology. For the quarters ended September 30, 2004 and 2003, Ford charged us approximately $900,000 and $1.2 million, respectively. For the nine months ended September 30, 2004 and 2003, Ford charged us approximately $3.0 million and $5.1 million, respectively. In 2003, these payments began to decrease as we began deploying our own

technology in North America.

Lucent

In August 2001, we entered into a five-year agreement with Lucent Technologies to manage Lucent’s global trade operations in the United States. Subsequently, we expanded our relationship with Lucent by assuming responsibility for administering and managing Lucent’s global trade operations in other countries in North America, Europe, Brazil, and China. For the quarters ended September 30, 2004 and 2003, Lucent accounted for 12% and 14%, of total revenues respectively. For the nine months ended September 30, 2004 and 2003, Lucent accounted for 13% and 15%, of total revenues, respectively.

Lucent’s current agreement is transaction based with minimums which step-down annually. Historically, Lucent’s transaction volumes have been below the minimum threshold, and therefore our revenue from the Lucent contract has declined. The annualized step-down from 2003 to 2004 was approximately $2.2 million of revenue. In August 2004, and thereafter, Lucent will be able to terminate the agreement for convenience by providing us with six months advance notice. We are in the process of negotiating an extension to the agreement.

Acquisitions

On June 19, 2003, we acquired GE’s internal U.S. customs import operations. We also entered into a Managed Services agreement under which Vastera will manage the U.S. customs import operations for five of GE’s U.S. divisions for a minimum term of three years. GE may terminate this agreement for convenience commencing on July 1, 2006, after providing the Company six months’ advance notice. The results of GE’s internal U.S. customs import operations have been included in our operations since July 1, 2003, the effective date of the acquisition. In exchange for its internal U.S. customs import operations, GE received $3.0 million in cash and 51,046 shares of our common stock, valued at approximately $312,000. The purchase price, including transaction costs of approximately $62,000, totaled approximately $3.4 million.

Critical Accounting Policies

We consider our accounting policies related to revenue recognition, deferred revenues, internal use software and intangible assets to be critical to our business operations and the understanding of our results of operations. The impact and associated risks related to these policies on our business operations are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a summary of significant accounting policies used in the preparation of our consolidated financial statements, see the Notes to our Consolidated Financial Statements in Item 1 of this Report. Our preparation of this Report requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. We cannot be sure that actual results will not differ from those estimates.

Source of Revenues and Revenue Recognition Policy

Managed Services Revenues

Managed services revenues are derived from agreements that provide for transaction or services fees based on the performance and delivery of our Managed Services solutions. Managed Services solutions include the processing of our clients’ customs and shipment entries and the classifying of clients’ goods. Managed Services transaction arrangements are often subject to annual or quarterly minimum transaction thresholds and revenues are recognized based on the lower of the cumulative actual transactions processed using a weighted-average transaction rate or the cumulative amount billable. For those Managed Services transaction arrangements subject to annual minimums and for those arrangements where the amount billable for interim periods is limited to the pro-rata portion of the annual minimum, transactions processed in excess of the minimum in each period are not billable, and, therefore, revenue is not recognized until the end of the related year. Certain Managed Services arrangements are based upon a fixed services fee. Revenues associated with these arrangements are recognized ratably over the term of the arrangement and limited to the amounts billable. In addition, we may receive annual gainsharing fees under certain Managed Services arrangements based on a percentage of the client’s annual cost savings, as defined in those Managed Services arrangements. These gainsharing fees are recognized when they become fixed and determinable. Managed Services transaction minimums and fixed service fees are typically billed monthly.

Software Revenues

Software revenues consist of term license revenues, perpetual software license revenues, and transaction-based revenues. We recognize revenue from the sale of software products in accordance with Statement of Position (“SOP”) 97-2, Software Revenue

Recognition.

Term license revenues are derived from term software license arrangements in which our clients license our software products and obtain the right to unspecified enhancements on a when-and-if-available basis, ongoing support and content update services. Content updates are significant and frequent. Revenues are recognized ratably over the contract term. Term license arrangements typically range from three to five years. To the extent we host the software for our customers, the hosting fee is recognized ratably over the contract period in conjunction with the recognition of the license fee. Term license fees are typically billed annually, quarterly or monthly.

Perpetual software license revenues are derived from perpetual software license arrangements and related maintenance contracts. Maintenance contracts include the right to unspecified enhancements on a when-and-if available basis, ongoing support, and content update services. The content updates provided under maintenance arrangements are significant and frequent, and, as a result, revenues from perpetual software license sales are recognized ratably over the estimated economic life of the product. We have estimated that the life of the product is three years, which is consistent with the historical periods between major upgrades to the functionality and architecture of our products. Accordingly, we experience a drop-off in software revenues related to perpetual licenses at the end of the three-year amortization period. Revenues from maintenance contracts are recognized ratably over the contract term, typically one year. To the extent we host the software for our customers, the hosting fee is recognized ratably over the contract period in conjunction with the recognition of the license fee.

Transaction-based revenues are derived from agreements that provide for transaction fees based on a client’s usage of our software products. Revenues from the usage of our software products are recognized as transactions occur.

We recognize revenues from arrangements with resellers beginning when the software product is sold to the end user. Any annual transaction minimums not sold by the reseller to the end customers are recognized as revenues upon the expiration of the annual minimum period.

Services Revenues

Services revenues are derived from implementation, Trade Management Consulting, and training services. Services are performed on a time and materials basis or under fixed price arrangements. Revenues on time and materials contracts are billed and recognized based on fixed billable rates for hours delivered, and revenues on fixed priced contracts are recognized as the services are performed, using the percentage of completion method of accounting based on the ratio of costs incurred to total estimated costs to be incurred. Losses on fixed price arrangements are recognized when known.

For multiple-element arrangements where we provide both software and software-related services, we defer the service fee, based on vendor-specific objective evidence of fair value, and recognize it as the services are performed.

Internal Use Software

In accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, we capitalize costs associated with the implementation and integration of our trade management platform to our Managed Services operations, related to certain capitalizable tasks including the technical design, system configuration and testing phases of the integration process. Judgment is involved in determining which development tasks associated with the platform integration are capitalizable pursuant to SOP 98-1. These costs are amortized as costs of managed services revenues over three years, and amortization commences upon the completion of the integration to the Vastera platform.

Goodwill and Intangible Assets

In accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, we prepare an annual assessment to test for impairment of goodwill. Our assessment date is December 31^st of each year. The assessment requires us to compare the carrying value of our reporting units to their fair values. To the extent the carrying amount of a reporting unit exceeds the fair value, we are required to compare the implied fair value, as defined, of reporting unit goodwill with the carrying amount to determine the amount of impairment. The fair value and the implied fair value, as defined, is determined for the reporting units taking into consideration many factors, such as current performance, future projections, and market conditions.

In accordance with SFAS No. 144, Accounting for Impairment for or Disposal of Long-Lived Assets, purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The estimated undiscounted future cash flows of an asset takes into consideration many factors, such as current performance, future projections, and market conditions.

Management’s Disclosure of Non-GAAP Financial Measures

From time to time, management makes public disclosures, other than in our SEC filings on Form 10-Q or Form 10-K, of certain financial measures such as pro forma earnings (loss) and EBITDA, as adjusted (as defined below), that are not considered

GAAP financial measures. On October 21, 2004, we issued an earnings press release and included it as an exhibit to a Form 8-K we filed with the SEC the same day. This press release contained reconciliations of pro forma earnings (loss) and EBITDA, as adjusted, to our reported net loss.

Management believes that pro forma earnings (loss) is a useful supplement to GAAP financial measures as it measures our operating performance and liquidity for the reporting period because it excludes certain charges associated with past events that are not related to current operations or that are not relevant to current operations and will not be in the foreseeable future. Because we have such a significant balance of net operating losses that we will be able to carry forward and apply against future U.S. tax liabilities, we exclude income taxes from the calculation of pro forma earnings (loss). Although we do pay income taxes on a portion of the revenues we generate, the aggregate amount of such payments is not material in relation to our net operating losses. Until such time as we generate income from operations and have fully applied our net operating losses to future tax liabilities, which we do not expect to occur during the foreseeable future, we believe that income taxes will not be a relevant element of our operating performance. The excluded intangible amortization expense and impairment of goodwill and intangibles are associated with identifiable intangible assets from prior acquisitions. The excluded stock-based compensation expense pertains to deferred non-cash compensation charges recorded in connection with our initial public offering of common stock and from prior acquisitions.

EBITDA, as adjusted, excludes expenses related to amortization of intangible assets, restructuring charges, impairment of goodwill and intangibles, stock-based compensation, income taxes, depreciation, amortization of revenue discounts related to customer contracts and amortization of capitalized internal-use software costs, and other income, net. Management uses EBITDA, as adjusted, to measure and evaluate our operating performance and liquidity, because it reflects the resources available from the reporting period’s operations for operating and strategic opportunities. These opportunities include investing in the business, meeting financing obligations, making strategic acquisitions, and paying other cash obligations. Therefore, management believes EBITDA, as adjusted, is an appropriate measure by which to evaluate our operating performance and liquidity.

Pro forma earning (loss) and EBITDA, as adjusted, however, should be considered in addition to, and not as a substitute for or as being superior to, operating net losses, cash flows, or other measures of financial performance prepared in accordance with U.S. GAAP.

Comparison of the Quarter Ended September 30, 2004 to the Quarter Ended September 30, 2003

Revenues

															Future
	For the Three Months Ended September 30,														Expected
	2004				2003										% of
	Amount		Percent of Total		Amount			Percent of Total		Increase (Decrease)					Total Revenue
	(in thousands)				(in thousands)					(in thousands)

Managed services	$	13,740	63	%	$		14,084	65	%	$	(344	)	(2	)%	65-70	%
Software	2,639		12		2,936			13		(297		)	(10	)	10-15
Services	5,432		25		4,675			22		757			16		15-20
Total revenues	$	21,811	100	%	$	21,695		100	%	$	116		1	%

Managed services revenues. We derive managed services revenues from agreements that provide for transaction or service fees based on our performance of Managed Services.

The decrease in managed services revenues for the three months ended September 30, 2004 from the three months ended September 30, 2003 primarily resulted from the following:

• A reduction in revenue from the effect of Lucent and a few other contract transaction minimum step-downs in 2003 because, in some of our transaction-based managed service contracts, the minimum number of guaranteed transactions declines over time. To the extent the minimum volumes step-down over time and the customer transaction volumes are below the minimum, our revenues decrease over that time period: offset by;

• Other new business revenue from customer contracts signed since the third quarter of 2003.

Our top five Managed Services customers accounted for 90% and 91% of our managed services revenues in the quarters ended September 30, 2004 and 2003, respectively. Our non-US managed services revenues increased to $4.0 million in the third quarter of 2004 from approximately $3.6 million recognized in the third quarter of 2003. This increase resulted from new customer contracts in Europe. The favorable effect on revenues of changes in foreign currency exchange rates between the quarters ended September 30, 2004 and 2003was approximately $103,000. We expect non-US managed services revenues to continue to increase as a percentage of managed services revenues in the future as we grow our international business.

In 2004, we expect revenues on a few of our customer contracts to decrease due to reductions in the base minimum fees associated with the step-down in the minimum number of transactions in those contracts. We estimate between approximately

$2.0 million and $3.0 million of reduced revenues from these contracts in 2004 compared to 2003. Additionally, revenue derived from large customer contracts may change as we renew these contracts. If we fail to maintain or expand the scope of services provided under these contracts, our revenues from these contracts will decrease. We also expect our revenues in 2005 will decrease when compared to 2004. We anticipate that the amount of new business closed in 2004 will not offset the loss of the Visteon contract.

Software revenues. Software revenues consist of term license revenues, perpetual software license revenues, maintenance revenues, and transaction-based revenues.

The decrease in revenues resulted primarily from the expiration of a $2.5 million annual license fee from a Japanese customer, the drop-off of fully recognized revenue from perpetual licenses sold in prior years, and maintenance cancellations. These declines were partially offset by an increase in software revenues from new customers. Our top five software customers accounted for 28% and 37% of our total software revenues during the three months ended September 30, 2004 and 2003, respectively.

We expect 2004 software revenues to decrease compared to 2003 because new business will not offset the expiration of the $2.5 million per year license fee in January 2004 from a Japanese customer and the drop-off of revenues from perpetual licenses.

Services revenues. We derive services revenues from the implementation of software for our customers, management consulting, and training services.

Our services revenues fluctuate from quarter to quarter based on many factors, such as demand by our customers, the number of billable days in a quarter, utilization, and the number of new software contracts executed in recent quarters. Historically, less than 30% of our services revenues have been derived from implementation services performed in connection with new software license sales. The increase in revenues was driven by our Trade Management Consulting business, increased implementation project work from a few customers, and the recognition of approximately $300,000 of revenue that had been deferred in prior quarters because we concluded the fees were not fixed or uncertainty existed regarding the collectibility of the fees.

Our five largest services customers accounted for 61% and 54% of our services revenues for the quarters ended September 30, 2004 and 2003, respectively.

Because the third quarter results were better than we anticipated, 2004 services revenue will be higher than 2003 services revenue.

Cost of Revenues

	For the Three Months Ended September 30,
	2004					2003
	Amount			Percent of Segment Revenues		Amount			Percent of Segment Revenues		Increase (Decrease)
	(in thousands)					(in thousands)					(in thousands)

Managed services	$		8,403	61	%	$	7,553		54	%	$	850	11	%
Software	758			29		716			24		42		6
Services	3,828			70		3,421			73		407		12
Total cost of revenues	$	12,989		60		$		11,690	54		$	1,299	11

Cost of managed services revenues. Cost of managed services revenues consist of salaries and related expenses, reimbursed expenses to Ford for our Managed Services organization and amortization of capitalized internal use software costs related to implementation and integration of our trade management platform to our Managed Services operation.

The cost increase in absolute dollars and as a percentage of managed services revenues was largely due to the additional investment we have made in our Managed Services business and several new contracts with lower profit margins than our earlier contracts and the effect on costs of changes in exchange rates between the quarters. These costs were partially offset by efficiencies we achieved in our U.S. operations as we migrated from Ford’s technology systems to our own. We expect the cost of managed services revenues as a percentage of managed services revenues to increase on a quarterly basis for the foreseeable future due to the Lucent transaction minimum step-down and the loss of the Visteon contract.

Cost of software revenues. Cost of software revenues includes royalties owed to third parties for technology products integrated into our software products, as well as the cost of salaries and related expenses for our software customer support organization.

The increase as a percentage of software revenues results from a reduction in our software revenues. We expect the cost of

software revenues as a percentage of software revenues to be relatively constant in absolute dollars on a quarterly basis in the foreseeable future.

Cost of services revenues. Cost of services revenues includes the cost of salaries and related expenses for implementation, management consulting and training services provided to clients, as well as the cost of third parties contracted to provide either implementation services or Trade Management Consulting to our clients.

From quarter to quarter as customer demand fluctuates, the cost of services revenues will fluctuate based on actions we take to align our personnel capacity with demand, such as changes in our use of subcontractors, delays or accelerations of hiring personnel and the temporary deployment of resources to or from other business segments. The increase in cost of services revenues over prior year is driven by an increase in personnel and other resource costs.

We expect the cost of services to fluctuate relative to services revenues in 2004 on a quarterly basis, but remain relatively consistent on a percentage of services revenues basis for the year.

Operating Expenses

	For the Three Months Ended September 30,
	2004				2003
	Amount		Percent of Total Revenues		Amount		Percent of Total Revenues		Increase (Decrease)
	(in thousands)				(in thousands)				(in thousands)

Sales and marketing	$	2,531	12	%	$	2,290	11	%	$	241	11	%
Research and development	3,187		15		2,954		14		233		8
General and administrative	2,922		13		2,663		12		259		10
Depreciation	1,353		6		1,281		6		72		6

Sales and marketing. Sales and marketing expense consists primarily of salaries and commissions earned by sales and marketing personnel, public relations, trade shows and travel expenses related to both promotional events and direct sales efforts.

The increase in sales and marketing expense resulted from an increase in personnel expense, marketing programs, and bad debt expense. We expect sales and marketing expense to remain constant in absolute dollars on a quarterly basis, and higher in 2004 compared to 2003 due to the investment we made in 2004.

Research and development. Research and development expense consists primarily of salaries, benefits, and equipment for personnel who develop and support software for external sale and use in our Managed Services business.

The increase in research and development costs was primarily from costs associated with the use of subcontractors, which were not incurred in the prior period. We anticipate research and development expense to be slightly higher in 2004 compared to 2003.

General and administrative. General and administrative expense consists primarily of salaries, benefits, outside accounting, legal, insurance fees and related costs for executive, finance, legal, human resources, administrative and information services personnel.

The increase in general and administrative expense resulted from an increase in corporate insurance costs and an increase in the number of accounting and finance staff and work related to Sarbanes-Oxley compliance. We expect general and administrative expense to increase slightly in 2004 compared to 2003 when we further expand our operations in Europe and Asia.

Depreciation. The increase resulted from the depreciation of fixed assets we purchased to build the technology infrastructure needed to support our business. Most of these new assets were acquired to build out our data center. We expect our depreciation expense to continue increasing in absolute dollars in 2004 as we continue to invest in our infrastructure. However, since we are currently investing in capital equipment and software at a level below our current depreciation level, we expect depreciation to decrease over time.

	For the Three Months Ended September 30,
	2004				2003
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Decrease
	(in thousands)				(in thousands)				(in thousands)

Intangible amortization expense	$	135	1	%	$	719	3	%	(584	)	(81	)%
Stock-based compensation	—		—		189		1		(189	)	(100	)

Intangible amortization expense. During the fourth quarter of 2003, we recognized impairment charges of approximately $6.1 million related to intangible assets. As a result, amortization expense has decreased significantly in 2004.

Stock-based compensation. Our stock based compensation resulted from options issued to employees prior to our initial public offering in 2000 with exercise prices less than fair value and from options issued to employees in connection with our acquisition of Speedchain in 2001. There was no stock based compensation during the quarter ended September 30, 2004 as prior amounts were amortized over the related vesting period.

Other Income (Expenses) and Income Taxes

	For the Three Months Ended September 30,
	2004			2003			Increase (Decrease)
	(in thousands)			(in thousands)			(in thousands)

Other income (expenses), net	$	168		$	112		$	56		50	%
Income taxes	(55		)	(150		)	(95		)	(63	)

Other income (expenses), net. Other income (expenses), net fluctuates based on the amount of cash balances available for investment, borrowings under our lines of credit, interest and other expenses related to our equipment borrowings, and any realized gains and losses on investments. The increase resulted primarily from higher interest income and lower interest expense.

Income taxes. For the three months ended September 30, 2004 and 2003, our income tax provision was comprised of federal, state, and foreign taxes. The federal tax provision represents alternative minimum tax that resulted from certain limitations placed on the utilization net operating losses under the alternative minimum tax system. The state tax provision consists primarily of the Single Business Tax assessed in Michigan and other miscellaneous franchise taxes. We have recorded a valuation allowance for the full amount of our net deferred tax assets, including the credit for the alternative minimum tax, as a result of the uncertainty surrounding the timing of the realization of these future tax benefits. The decrease in income tax expense resulted primarily from lower federal taxes and withholding taxes in the quarter than in prior year. Income-based withholding taxes are derived from services provided to customers in certain geographies outside of the United States.

Comparison of the Nine Months Ended September 30, 2004 to the Nine Months Ended September 30, 2003

Revenues

	For the Nine Months Ended September 30,
	2004				2003
	Amount		Percent of Total		Amount			Percent of Total		Increase (Decrease)
	(in thousands)				(in thousands)					(in thousands)

Managed services	$	41,920	66	%	$		41,343	65	%	$	577		1	%
Software	7,344		11		8,552			13		(1,208		)	(14	)
Services	14,664		23		14,268			22		396			3
Total revenues	$	63,928	100	%	$	64,163		100	%	$	(235	)	0	%

Managed services revenues.

The increase in managed services revenues from the nine months ended September 30, 2004 to the nine months ended September 30, 2003 primarily resulted from the following:

• Revenue from our new contract with GE, which began on July 1, 2003;

• Higher nonrecurring project-based work in the first quarter of 2004;

• Other new business revenue from customer contracts signed in 2003; primarily offset by

Our top five Managed Services customers accounted for 89% and 93% of our managed services revenues in the nine months ended September 30, 2004 and 2003, respectively. Our non-US managed services revenues increased to $11.9 million in the nine months ended September 30, 2004 from approximately $10.5 million recognized in the nine months ended September 30, 2003. This increase resulted from new customer contracts in Europe and Brazil. The favorable effect on revenues of changes in foreign currency exchange rates between the nine months ended September 30, 2004 and 2003 was approximately $534,000 of managed service revenues. We expect non-US managed services revenues to continue to increase as a percentage of managed services revenues in the future.

Software revenues.

The decrease in revenues resulted primarily from the expiration of a $2.5 million annual license fee from a Japanese customer, the drop-off of fully recognized revenue from perpetual licenses sold in prior years, and maintenance cancellations. These declines were partially offset by an increase in software revenues from new customers. Our top five software customers accounted for 22% and 38% of our total software revenues during the nine months ended September 30, 2004 and 2003, respectively.

Services revenues.

Our services revenues fluctuate from quarter to quarter based on many factors, such as demand by our customers, the number of billable days in a quarter, utilization, and the number of new software contracts executed in recent quarters. Historically, less than 30% of our services revenues have been derived from implementation services performed in connection with new software license sales. The increase in revenues was driven by our Trade Management Consulting business and the recognition of approximately $300,000 of revenue that had been deferred in prior quarters because we concluded the fees were not fixed or uncertainty existed regarding the collectibility of the fees.

Our five largest services customers accounted for 55% and 57% of our services revenues in the nine months ended September 30, 2004 and 2003, respectively.

Cost of Revenues

	For the Nine Months Ended September 30,
	2004					2003
	Amount			Percent of Segment Revenues		Amount			Percent of Segment Revenues		Increase (Decrease)
	(in thousands)					(in thousands)					(in thousands)

Managed services	$		24,557	59	%	$		22,488	54	%	$	2,069		9	%
Software	2,116			29		2,110			25		6			—
Services	10,822			74		10,427			73		395			4
Total cost of revenues	$	37,495		59		$	35,025		55		$		2,470	7

Cost of managed services revenues.

The cost increase in absolute dollars and as a percentage of managed services revenues was largely due to the additional investment we have made in our Managed Service business and several new contracts with lower profit margins than our earlier contracts and the effect on costs of changes in exchange rates between the quarters. These costs were partially offset by efficiencies we achieved in our U.S. operations as we migrated from Ford’s technology systems to our own.

Cost of software revenues.

The increase as a percentage of software revenues results from a reduction in our software revenues.

Cost of services revenues.

Operating Expenses

	For the Nine Months Ended September 30,
	2004				2003
	Amount		Percent of Total Revenues		Amount		Percent of Total Revenues		Increase (Decrease)
	(in thousands)				(in thousands)				(in thousands)

Sales and marketing	$	7,461	12	%	$	6,836	11	%	$	625	9	%
Research and development	9,211		14		8,990		14		221		2
General and administrative	8,699		14		8,136		13		563		7
Depreciation	4,065		6		3,845		6		220		6

Sales and marketing.

The increase in sales and marketing expense primarily resulted from an increase in bad debt expense and severance costs related to our former Vice President of Sales and Marketing. Costs associated with marketing programs and personnel were also higher when compared to the same period in the prior year.

Research and development.

The increase in research and development costs was primarily from costs associated with the use of technology consultants and subcontractors, partially offset by a decrease in headcount.

General and administrative.

The increase in general and administrative expense resulted from an increase in corporate insurance costs, an increase in the number of accounting and finance staff and work related to Sarbanes-Oxley compliance.

	For the Nine Months Ended June 30,
	2004				2003
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Decrease
	(in thousands)				(in thousands)				(in thousands)

Intangible amortization expense	$	612	1	%	$	2,106	3	%	$	(1,494	)	(71	)%
Stock-based compensation	46		—		834		1		(788		)	(94	)

Stock-based compensation. Our stock based compensation resulted from options issued to employees prior to our initial public offering in 2000 with exercise prices less than fair value and from options issued to employees in connection with our acquisition of Speedchain in 2001. The Company records stock based compensation on an accelerated basis. Because we have not issued options below market value in the past six months or acquired options in connection with an acquisition since the Speedchain acquisition, the expense incurred during the nine months

ended September 30, 2004 was lower than the expense incurred during the nine months ended September 30, 2003. The deferred compensation balance was zero as of September 30, 2004.

Other Income (Expenses) and Income Taxes

	For the Nine Months Ended September 30,
	2004			2003			Increase (Decrease)
	(in thousands)			(in thousands)			(in thousands)

Other income (expenses), net	$	364		$	448		$	(84	)	(19	)%
Income taxes	(283		)	(458		)	(175		)	(38	)

Other income (expenses), net. Other income (expenses), net fluctuates based on the amount of cash balances available for investment, borrowings under our lines of credit, interest and other expenses related to our equipment borrowings, and any realized gains and losses on investments. The decrease resulted primarily from lower investment interest rates.

Income taxes. For the nine months ended September 30, 2004 and 2003, our income tax provision was comprised of federal, state, and foreign taxes. The federal tax provision represents alternative minimum tax that resulted from certain limitations placed on the utilization net operating losses under the alternative minimum tax system. The state tax provision consists primarily of the Single Business Tax assessed in Michigan and other miscellaneous franchise taxes. We have recorded a valuation allowance for the full amount of our net deferred tax assets, including the credit for the alternative minimum tax, as a result of the uncertainty surrounding the timing of the realization of these future tax benefits. The decrease in income tax expense resulted primarily from lower withholding taxes in the quarter than in prior year. Income-based withholding taxes are derived from services provided to customers in certain geographies outside of the United States.

Liquidity and Capital Resources

Obligations

Lines of Credit

We have a term loan, a secured revolving line of credit (Line of Credit), and an equipment line of credit (Equipment Line of Credit) with Comerica Bank.

We paid the remaining term loan balance during 2004. The balance under the term loan was zero and approximately $1.0 million as of September 30, 2004 and December 31, 2003, respectively.

We may borrow up to $10 million under the revolving line of credit, with a $2.5 million sub-limit for the issuance of letters of credit. Advances under the revolving line of credit are limited to the lesser of $10 million or 80% of eligible accounts receivable, as defined in the loan agreement. The revolving line of credit bears interest at the bank’s prime rate (4.75% as of September 30, 2004) and matured in July 2004. There was no outstanding balance under the revolving line of credit as of September 30, 2004 and December 31, 2003.

In the first and third quarters of 2003, we borrowed approximately $614,000 and $488,000, respectively against the equipment line of credit. The availability under the Equipment Line of Credit expired in July 2003. Commencing on July 31, 2003, interest and principal began to be payable in monthly installments on all borrowings made under the equipment line of credit.

In July 2004, we renewed our existing Line of Credit for $10 million, with a $2.5 million sub-limit for the issuance of letters of credit, and a new equipment line of credit for $5 million with Comerica Bank. The renewed Line of Credit will mature in July 2006 and the renewed equipment line of credit will mature three years from the date of the general equipment or software purchases. The outstanding balance and current portion of balance under the Equipment Line of Credit was approximately $430,000 as of September 30, 2004, and $796,000 and $490,000, respectively as of December 31, 2003. The Equipment Line of Credit has two interest-only payment periods and bears interest at the bank’s prime rate plus 50 basis points (5.25% as of September 30, 2004).

The terms of the renewed Line of Credit and the renewed Equipment Line of Credit require us to comply with several financial covenants, including restrictions and limitations on future indebtedness, sale of assets and material changes in our business. Through September 30, 2004, we were in compliance with these covenants.

Leases

We have various capital leases with 36-month to 48-month repayment periods. In March 2003, we obtained a new equipment leasing arrangement with a vendor for approximately $886,000. Amounts borrowed are due over 36 months. Total capital lease obligations outstanding as of September 30, 2004 and December 31, 2003, were approximately $464,000 and $764,000, respectively.

We lease various equipment and office space under operating lease agreements expiring at various dates through 2013. In addition to base rent, we are responsible for certain taxes, utilities, and maintenance costs.

Guarantees

In some of our software license arrangements, we have agreed to indemnify customers for any damages they sustain from a claim for intellectual property infringement. Additionally, subject to specified contractual limitations on amount, under our Managed Services agreements, we have agreed to indemnify our customers for any damages they sustain from our performance of Managed Services in a non-compliant manner. Although we do not believe that our products infringe the intellectual property rights of any third party or that we are performing services in a non-compliant manner, we cannot estimate our maximum liability exposure, because of the inherent uncertainty associated with any such claims and the varying nature of the indemnification levels to which we have agreed.

Cash Flows

	For the Nine Months Ended September 30,
	2004			2003
	(in thousands)			(in thousands)

Cash and cash equivalents and short-term investments, end of period	$	55,614		$	53,050
Cash and cash equivalents and short-term investments, beginning of period	56,448			56,957
Net decrease in cash and cash equivalents and short-term investments	$	(834	)	$	(3,907	)

The net decrease in cash and cash equivalents and short-term investments for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003, is primarily due to the following:

• Improved working capital;

• Lower debt payments, was partially offset by

• Lower proceeds from our Employee Stock Purchase Plan

• Increased capital expenditures

• No cash investments in acquisitions in 2004

Future Cash Investment Needs

We intend to continue investing in the expansion of our business, particularly to build out our global platform and infrastructure. Additionally, we are spending more on our Managed Services operations in 2004 than we did in 2003. Our future liquidity and capital requirements will depend on numerous factors, including:

• The costs and timing of expansion of our sales and marketing activities;

• The costs and timing of expansion of our operating capabilities;

• The costs and timing of our product development efforts and the success of those development efforts;

• The extent to which our existing and new products and services gain market acceptance;

• The level and timing of our revenues;

• The costs involved in maintaining and enforcing our intellectual property rights; and

• Available borrowings under line of credit and capital lease arrangements.

Accordingly, until we generate and sustain profits from our operations to fund these investments fully, our cash, cash equivalents, and short-term investments are likely to continue to decline. In addition, we may use cash resources to fund acquisitions of complementary businesses and technologies. We believe that our current cash resources will be sufficient to meet our working capital and capital requirements for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event that we need additional financing, we may not be able to raise it on terms acceptable to us, if at all.

Risks Relating to Our Business

Before deciding to invest in our Company or to maintain or increase your investment, you should consider carefully the risks described below, in addition to the other information contained in this report and in our other filings with the SEC, including our subsequent reports on Forms 10-K, 10-Q and 8-K. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occurs, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

We have a history of losses and expect to incur losses in the near future.

We incurred net losses of approximately $71.2 million, $11.4 million, $45.8 million, $35.8 million, and $10.5 million in 2003, 2002, 2001, 2000, and 1999, respectively. Our accumulated deficit as of September 30, 2004 was approximately $257 million. We believe that the success of our business depends on our ability to increase revenues and to manage our operating expenses. If our revenues fail to grow at anticipated rates or our operating expenses are not properly managed, we may not be able to achieve or maintain profitability, which would increase the possibility that the value of your investment will decline. Although we generated positive cash flows from operations in the nine months ended September 30, 2004, in part because we reduced operating expenses, we cannot assure you that we can continue to generate positive cash flows, especially if our revenues do not increase. As of September 30, 2004, we had cash and short-term investments of $55.6 million compared to $56.4 as of December 31, 2003. This is likely to be insufficient to sustain our operations over the long-term if we do not generate positive cash flow from operations over time.

Our Managed Services business model is unproven, and our inability to provide Managed Services successfully to existing and future clients would substantially reduce our revenues, increase our costs, hurt our reputation in our industry, and adversely affect our business.

The long-term success of our Managed Services business is predicated on our ability to leverage our investment in our technology and processes to lower our per transaction costs to the lowest level possible. As a critical element of our strategy, we intend to continue providing Managed Services to our current and future clients. These services range from providing operational management for a single global trade process to managing a client’s entire worldwide trade operation. We expect the revenues we receive from providing Managed Services to our current and future clients will continue to represent the largest portion of our total revenues. If we are unsuccessful in effectively lowering our costs of delivery to acceptable levels, we may be unable to achieve a level of gross margin necessary to achieve and sustain profitability. Additionally, if we are unable to perform our obligations under our agreements with Ford, Lucent Technologies or Nortel Networks or to provide Managed Services successfully to our other clients, we would experience a significant reduction in our revenues, increases in our costs, and damage to our reputation, which would adversely affect our business and results of operations.

Our revenues are concentrated among a few customers. Therefore, our business success is dependent on our maintaining good relationships with these customers.

In 2003, 2002, and 2001, we derived approximately 64%, 59%, and 67%, respectively, of our total revenues from our top five customers. During the third quarters of 2004 and 2003, we derived approximately 60% and 65%, respectively, of our total revenues from our top five customers. During the nine months ended September 30, 2004 and 2003, we derived approximately 63% and 66%, respectively, of our total revenues from our top five customers. For the quarters ended September 30, 2004 and 2003, Ford accounted for 30%, of total revenues. For the nine months ended September 30, 2004 and 2003, Ford accounted for 30% of total revenues, respectively. For the quarters ended September 30, 2004 and 2003, Lucent accounted for 12% and 14%, of total revenues respectively. For the nine months ended September 30, 2004 and 2003, Lucent accounted for 13% and 15% of total revenues, respectively. We expect this customer concentration to exist for the foreseeable future. We had no other customer that accounted for greater than 10% of our revenues for the periods noted. As we continue to expand our relationships with existing Managed Services customers and if we continue to sign large contracts with new customers, each such relationship will be of added significance to us. Additionally, if we are unable to sign contracts that generate significant revenues, this heavy concentration of customers will persist, which could cause us to become even more dependent on each of our existing large customers.

We also expect to continue to derive a significant portion of our total revenues from Ford, Lucent, and other large customers for at least the next several years. Some of our agreements permit a customer to terminate for convenience after a specified period of time. We cannot assure you that we will be able to maintain or renew these agreements. In July 2004, Visteon Corporation notified us that it will not renew its agreement for Managed Services when it expires on December 31, 2004. If any other significant agreements do not renew, our results of operations and financial condition would be adversely affected. If we fail to maintain or expand the scope of services provided under these contracts, our revenues from these contracts will decrease. We expect that our total 2004 revenues will be below our 2003 revenue level, and revenues in future periods may not increase above 2003 and 2004 levels until such time as we can accelerate the rate of our sales growth. We also expect our revenues in 2005 will decrease when compared to 2004. If we also fail to reduce the expenses of our business to match lower revenues, our net losses may increase and our cash flows could be negatively impacted.

Our inability to renew existing Managed Services contracts on substantially similar terms may cause revenues to decline which would have an adverse affect our business.

Generally, our Managed Services agreements contain a specified time period during which our customers have guaranteed minimum fixed levels of revenues to us. As these time periods expire, our customers have, and can be expected to continue, indicated their intent to negotiate new terms for the future. Our inability to renew such contracts on financial terms substantially similar to the existing terms will cause our revenues to decline and may adversely affect our business.

Some of our customers have been evolving or otherwise changing their business models. As these customers change their business models, their volume requirements and level of service required from us may decline, and adversely affect our business.

During the past few years, some of our clients have changed their business models significantly by outsourcing various business functions or using contract manufacturers. For example, in 2004, Nortel Networks announced that it intends to outsource its manufacturing operations to Flextronics International Ltd. The effects of such changes in our customers’ business models may include a reduction in transaction volumes, as importing and exporting of goods and parts may now occur through third party contract manufacturers and outsourcing companies. If our customers’ transaction volumes decline significantly and we are unable to add the third-party contract manufacturers and outsourcing companies as customers, our revenues will decline, which would have an adverse impact on our business.

Any restriction on our ability to access a foreign country’s rules and regulations that we incorporate into our Global Content cost-effectively and legally, or any failure to update our Global Content timely to include changes in such rules and regulations, may compromise the effectiveness of our solutions and adversely impact our customer relationships and revenues.

The success of our Global Trade Management solutions depends on our ability to obtain or access the complex rules and regulations published by foreign governments governing a particular country’s import and export of goods. The foundation of our solutions, Global Content, is subject to rapid change at the initiative of foreign governments based on factors beyond our control. Any changes in a country’s rules and regulations relating to global trade that we are unable to include in our Global Content library may result in dissatisfied clients and possible litigation. Moreover, to the extent a foreign government restricts our access to its rules and regulations, charges a fee for such access or grants proprietary rights to such information to one or more of our competitors, our solutions may not be useful to, or cost efficient for, our current and future clients and our revenues could decrease.

Fluctuations in our operating results and the composition of our revenues, compared to the expectations of market analysts and investors, may cause the price of our common stock to decline.

Our operating results have varied in the past and could fluctuate significantly in the future. We expect that our operating results will continue to vary in the future, based on a number of factors, including:

• The possible loss of a significant customer;

• The possible renegotiation of contract terms with one or more significant customers;

• Fluctuations in the demand for our products and services;

• Our ability, and the associated timing, to convert our customers to our technology platform;

• Competition in our industry;

• Inability to deliver compliant solutions;

• Changes in trade regulations;

• Variability in the mix of our managed services, software, and consulting revenues; and

• Timing of new solution introductions and enhancements to our TradeSphere and TradePrism.com solutions.

Several of these factors are outside our control. Due to the foregoing factors, our annual or quarterly results of operations may not meet the expectations of securities analysts and investors, which is likely to cause the price of our common stock to decline.

We have a new senior management team that may not be able to develop and execute upon a successful business strategy.

During the past 24 months, we have hired three new people into our executive management team, which includes the hiring

of a new CEO within the past 12 months, and we replaced the individual overseeing our Managed Services operations. This new management team is responsible for developing a plan to significantly increase sales, improving product quality, gaining market acceptance of our Managed Services offerings, and expanding our global operations. Our management team must develop and execute upon a sound and appropriate strategy to grow revenues and achieve significant profitability. If the new management team is unable to develop a sound and appropriate strategy, or if it is unable to execute upon such a strategy, our business will be adversely affected.

We may be unable to attract and retain key personnel, which would adversely affect our ability to develop and manage our business effectively.

Our future performance will depend largely on the efforts and abilities of our senior executives, key technical, professional services, sales and marketing and managerial personnel. This dependence is extremely important to our business because personal relationships are a critical element of obtaining and maintaining clients. Also, we are dependent upon our technical personnel to enhance our technology platforms so that our business remains competitive. Our success will depend on our ability to attract and retain these key employees in the future. The market for such individuals is extremely competitive, and we may not find qualified replacements for personnel who leave us. The loss of, or the inability to attract, any one or more of our key personnel may harm our ability to develop and manage our business effectively.

Our international operations and any continued expansion may expose us to business risks that could limit the effectiveness of our growth strategy, cause our operating results to suffer, and put some of our invested capital at risk of loss.

We intend to continue to expand our current international operations, entering into new international markets. This expansion will require significant management attention and financial resources to translate our software products into various languages successfully, to develop compliance expertise relating to regulatory agencies in more countries and to develop direct and indirect international sales and support channels. We face a number of risks associated with conducting our business internationally that could negatively affect our operating results, including:

• Language barriers, conflicting international business practices and other difficulties related to the management and administration of a global business;

• Longer sales cycles associated with educating foreign clients about the benefits of our products and services;

• Currency fluctuations and exchange rates;

• Difficulty in repatriating cash from some foreign jurisdictions;

• Longer collection time from foreign clients;

• Multiple, and possibly overlapping, tax structures and the burdens of complying with a wide variety of foreign laws;

• The need to consider characteristics unique to technology systems used internationally; and

• Economic or political instability in some international markets.

We may not succeed in our efforts or we may experience delays in the execution of our plan to enter new international markets, establish, maintain or increase international demand for our solutions or expand our international operations. Any of these difficulties may harm our growth strategy and could cause our operating results to suffer.

As we expand globally, we may establish operations in countries that become politically or economically unstable, which may put the capital we have invested in these operations at a risk of loss and cause our business to be adversely affected.

We intend to continue expanding our operations and serving our existing clients internationally. As we do so, we may establish operations in countries that become politically or economically unstable. If a country in which we commence operations becomes politically or economically unstable, the money and resources we have invested to establish such operations may be put at risk of loss, and if such money and resources are lost, our business may be adversely affected.

Our software products and Managed Services offerings are complex. During the sales cycle these offerings must be described and articulated to several individuals across a customer’s organization before a final purchasing decision is made. Because of the significant number of people with whom we must interact and the complexity of our software and Managed Services offerings, our sales cycle is lengthy and variable in nature, which makes it difficult for us to predict when or if sales will occur. Therefore, we may experience an unexpected shortfall in sales.

Due to the inherent complexities associated with global trade and the myriad of rules and regulations governing global trade, our software and Managed Services solutions are very complex. Additionally, many prospects face regulatory compliance issues of which they are unaware prior to us performing any due diligence. Because of the complexity of our software and Managed Services offerings, and the regulatory issues many prospects face during the sales cycle, our personnel must conduct in depth discussions and provide detailed explanations to several individuals across an organization. These people are often members of the finance, purchasing, customs, information technology, and legal departments of an organization. Moreover, these individuals typically view the purchase of our solutions as an important, but not core decision. As a result, they generally evaluate our solutions and determine their impact on existing infrastructure over a lengthy period of time. Because we must interact with, and educate so many distinct individuals during the sales cycle, revenues forecasted from a specific client for a particular quarter may be delayed to another quarter. Consequently, we may experience an unexpected shortfall in sales, which could adversely affect our operating results.

Any loss of our licensed third-party technology may result in increased costs of, or delays in, providing our solutions, which would harm our operating results.

We license technology from several companies on a non-exclusive basis that we have integrated into our TradeSphere product suite. This technology includes development tools and facilities from IBM (WebSphere and MQ Series) and Forte, which was acquired by Sun Microsystems. Our license with Sun Microsystems expires on December 31, 2005, and our license with IBM expires on June 30, 2006. If we cannot renew these technology licenses, we likely would face delays in the licensing of our TradeSphere products until equivalent technology, if any, can be identified, licensed and integrated, which would adversely affect our operating results.

If we interpret and analyze incorrectly the various laws and regulations contained in our Global Content or we perform our Managed Services in a non-compliant manner, we may face costly liability claims.

The foundation of our software solutions and Managed Services, Global Content, is a rules-based application that provides comprehensive management of government trade regulations and programs that must be acquired, interpreted, and updated by our in-country trade experts. Because of the legalistic and complex nature of Global Content, our inability to interpret and analyze accurately the rules and regulations upon which our Global Content is based may expose us to liability claims from our clients in connection with our current products and future products. Additionally, our Managed Services customers view us as global trade experts. If we perform our services in a manner that does not comply with legal or regulatory requirements, our clients could face severe penalties and they would seek recompense from us to make them whole. Any provisions in our agreements with our clients designed to limit our exposure to potential product or services liability claims may not be adequate to protect us from such claims. A claim of product liability or a claim that our performance of Managed Services in a non-compliant manner brought against us successfully could harm our financial condition. Even if unsuccessful, any claims could result in costly litigation and divert management’s attention and resources. Additionally, the effective implementation of our products may depend upon the successful operation of third-party licensed products in conjunction with our products and, therefore, any undetected errors in these licensed products may prevent the implementation or impair the functionality of our products, delay new product introductions, and harm our reputation.

The market for our Global Trade Management Managed Services and software offerings is a nascent one and the ultimate market size is difficult to quantify. If companies fail to adopt our offerings, our business will be adversely affected.

For most companies, Global Trade Management is a critical but non-core business function. Because the market for third-party Global Trade Management is a nascent one, many companies may be reluctant or unwilling to utilize a third-party service provider to manage their global trade, and will retain these functions in-house. If companies fail to adopt managed service offerings, our business will be adversely affected.

We are encountering competition from significantly larger companies that possess both greater financial resources and name recognition than we possess.

Although we believe our solutions are currently competitive, the market in which we operate is characterized by early adopters and is rapidly evolving. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial resources, name recognition, and other resources, such as international brokers, freight forwarders, logistics companies, and ERP software companies.

We may be unable to protect our proprietary rights adequately, which could result in their unauthorized use by our competitors and have an adverse impact on our revenues.

Our success depends on our ability to protect our proprietary rights. We rely primarily on:

• Confidentiality agreements with employees and third parties;

• Protective contractual provisions such as those contained in license agreements with consultants, vendors, and clients, although we have not signed such agreements in every case; and

• Copyright, trade secret, and trademark laws.

Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information we regard as proprietary. Other parties may breach confidentiality agreements or other protective contracts. We may not become aware of these breaches or have adequate remedies available. We may need to litigate claims against third parties who infringe our intellectual property rights, which could be costly, time-consuming, and would divert management’s attention and resources.

We may have to defend against intellectual property infringement claims, which could be expensive, and if we are unsuccessful, could result in substantial monetary liability and disrupt our business.

We cannot be certain that our solutions do not or will not infringe valid patents, copyrights, trademarks, or other intellectual property rights held by third parties, inside and outside the U.S. As a result, we may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business.

We may incur substantial expenses in defending against any third-party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability, may divert management’s attention from our core business, and may disrupt our business. In addition, if we are unsuccessful in defending such claims, we may need to obtain a license to the technology, which may not be available on acceptable terms or at all.

Any future acquisitions may be difficult to integrate and disruptive to our operations. We may not realize the expected benefits from any such acquisitions, and if we cannot address the challenges presented by acquisitions, our operating results may be harmed.

In the past, we have acquired businesses to expand our operations or market presence, and we intend to continue our expansion by acquiring or investing in companies, assets or technologies that complement our business and offer opportunities for growth. These transactions involve many risks and challenges that we might not successfully overcome, including:

• Difficulties in assimilating technologies, products, personnel, and operations;

• Disruption of our ongoing business and diversion of management’s attention from other business concerns;

• Risks of entering markets in which we have no or limited prior experience;

• Issuances of equity securities that may dilute your ownership interest in our common stock;

• Cash payments to, or the assumption of debt or other liabilities of, the companies we acquire; and

• Write-offs related to goodwill and other intangible assets and other adverse accounting consequences.

Your ability to influence corporate matters may be limited because our officers, directors, and affiliates will be able to control, and Ford will be able to influence, matters requiring stockholder approval and these parties may have interests that differ from yours.

As of September 30, 2004, our officers, directors, and affiliated entities, together with Ford, beneficially owned approximately 37% of the outstanding shares of our common stock. This concentration of ownership may delay, deter, or prevent acts that would result in a change of control, which in turn could reduce the market price of our common stock. Accordingly, these stockholders collectively may be able to control all matters requiring stockholder approval and, thereby, our management and affairs. Ford beneficially owns approximately 19% of the outstanding shares of our common stock. As the single largest stockholder of Vastera, Ford may exercise significant influence over corporate acts requiring stockholder approval, including a merger or sale of Vastera. Also, so long as Ford holds at least 5% of our common stock, it has the right to appoint a non-voting observer to our board of

Item 6: Exhibits and Reports on Form 8-K

The following exhibits are included herein:

31.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the President and Chief Executive Officer, dated November 8, 2004.

31.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated November 8, 2004.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the President and Chief Executive Officer, dated November 8, 2004.

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated November 8, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized in Dulles, Virginia on November 8, 2004.

	VASTERA, INC.

	By:	/s/ Maria Henry
		Maria Henry,
		Chief Financial Officer (Principal Financial Officer)

	By:	/s/ Kevin M. Boyce
		Kevin M. Boyce,
		Vice President, Finance and Corporate Controller (Principal Accounting Officer)

EXHIBITS

31.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the President and Chief Executive Officer, dated November 8, 2004.

31.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated November 8, 2004.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the President and Chief Executive Officer, dated November 8, 2004.

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated November 8, 2004.

Delaware		54-1616513
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

45025 Aviation Drive, Suite 300 Dulles, VA 20166 (703) 661-9006
(Address and Phone Number of Principal Executive Offices)

PART I -FINANCIAL INFORMATION (UNAUDITED)

Item 1:		Financial Statements

	CONDENSED CONSOLIDATED BALANCE SHEETS

	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3:		Qualitative and Quantitative Disclosures About Market Risk
Item 4:		Controls and Procedures

PART II - OTHER INFORMATION

Item 1:		Legal Proceedings
Item 2:		Changes in Securities and Use of Proceeds
Item 3:		Defaults Upon Senior Securities
Item 4:		Submission of Matters to a Vote of Security Holders
Item 5:		Other Information
Item 6:		Exhibits and Reports on Form 8-K

SIGNATURES

PART I - FINANCIAL INFORMATION (UNAUDITED)

Item 1: Financial Statements

1. Basis of Presentation and Nature of Business:

2. Summary of Significant Accounting Policies:

3. Restructuring

4. Acquisitions

5. Long-Term Debt:

6. Commitments and Contingencies:

7. Segment Information:

8. Transactions with Ford Motor Company:

9. Stock-based Compensation

10. Supplemental Information:

Cash Flow Information

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Future Cash Investment Needs

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Item 3: Defaults Upon Senior Securities

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

Item 5: Other Information

Item 6: Exhibits and Reports on Form 8-K