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As filed with the Securities and Exchange Commission on February 8, 2000

Registration No. 333-          

SECURITIES AND EXCHANGE COMMISSION

SEQUOIA SOFTWARE CORPORATION

5457 Twin Knolls Road

Richard C. Faint, Jr.

Copies to:

     Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  [   ]

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [   ]

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [   ]

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [   ]

     If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  [   ]

CALCULATION OF REGISTRATION FEE

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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We may not sell these securities until the registration statement filed with Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated February 8, 2000.

PROSPECTUS

            Shares

Sequoia Software Corporation

[Sequoia logo]

Common Stock

     This is our initial public offering of shares of common stock. We are offering            shares. No public market currently exists for our shares.

     We propose to list our common stock on the Nasdaq National Market under the symbol “SQSW.”

Investing in the shares involves risks. “Risk Factors” begin on page 9.

     Sequoia and the selling stockholders have granted the underwriters a 30-day option to purchase up to            additional shares of common stock on the same terms and conditions as set forth above solely to cover over-allotment, if any.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

     Lehman Brothers expects to deliver the shares on or about            , 2000.

LEHMAN BROTHERS

	SG COWEN

	WIT SOUNDVIEW

	FIDELITY CAPITAL MARKETS
	a division of National Financial Services Corporation
	Facilitating Electronic Distribution

          , 2000

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[INSIDE FRONT COVER PAGE OF PROSPECTUS]

Front Inside Cover:

      Near the top half of the page is a perspective view of a portal computer screen snapshot. Two arrows arc over from the left side of the page into the screen snapshot. Three arrows arc off the screen snapshot towards the right side of the page. In the middle of this page is the text “Sequoia XML Portal Server For Creating Interactive e-Business Portals.” On both the left and right side of this page are two quarter-moon shapes. At the bottom of the page, positioned between these quarter moons, is the Sequoia logo and the text “SEQUOIA” in all capital letters.

Gatefolds Left and Right:

      The left gatefold has a portal computer screen snapshot that extends to the middle of the page with three arrows that arc onto the right gatefold. The three arrows end at the three computer screens positioned to the right of the portal computer screen snapshot. The right page has a series of three computer screens positioned to the right of the portal computer screen snaphot and a series of five cylinders to the right side of the page. The three computer screens are located from left to right, and from bottom to top. The bottom left screen is a snapshot of a travel web site. The second screen to the upper right shows a number of data entry fields. The last screen on the upper right shows a “Microsoft DOS” style of screen illustrating a “dumb terminal.” To the right of each of these three screens is the shape of a cylinder. Under each of these three cylinders, is the text: “Web Sites;” Web-Enabled Databases;” and “Legacy Systems,” respectively from left to right. Two additional cylinders are located on the right side of the page, with the text “e-mail Systems” and “Networked Documents.” Near the top of the right gatefold is the text “Sequoia XML Portal Server” with additional text underneath of “For Creating Interactive e-Business Portals.” At the bottom of the left gatefold there is a pie shaped graphic with a center circle and six pie wedges circling around center. Each of the six pie wedges has text. The text of the center circle is “XML” with four lines of additional text centered underneath: “Integration Engine;” “Application Server;” “Content Delivery Server;” “Rules Engine.” In each of the six pie wedges around this center circle, is the following text, in a clockwise direction: “Active Personalization;” “Smart Summaries;” “XML Data Entry;” “Portal Management Console;” “Meta Search;” and a logo for Sequoia’s Xdex software. Underneath then Xdex logo is the text “XML Indexing.” There is a check-mark shaped shaded area that begins from the lower portion of the portal computer screen snapshot and moves across both gatefold pages.

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ABOUT THIS PROSPECTUS

      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.

      Until                        , 2000, all dealers that buy, sell or trade common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.

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PROSPECTUS SUMMARY

      You should read the following summary together with the more detailed information regarding us and our common stock being sold in this offering and our consolidated financial statements and the financial statements of Radian Systems, Inc. and the related notes appearing elsewhere in this prospectus.

Overview

      Sequoia Software Corporation is a leading provider of XML-based Internet infrastructure software for creating interactive e-business portals. Interactive portals are a new generation of e-business solutions that are designed to tap into today’s vast corporate and Internet information reservoirs in order to bring the right information to the right person at the right time. This new type of XML-based information portal is capable of intelligently aggregating data and content from disparate sources, presenting that information based upon a user’s profile, and enabling the user to interact with the original information source. These capabilities meet a growing need for software products that can sift through the increasing volumes of corporate and Internet-based information to identify and facilitate new e-business opportunities. From corporate intranets and extranets to Internet-based content and commerce providers, our products address a growing demand for a new breed of dynamic, flexible and standards-based e-business software that brings information and people together.

      Our flagship product is the Sequoia XML Portal Server, or XPS. We believe that XPS is the first interactive portal software product that is intrinsically based on eXtensible Markup Language, or XML. By using XML, XPS is distinctively capable of integrating, extracting and aggregating user-defined data and content from any variety of disparate information sources. Once XPS aggregates information, it utilizes our patent pending XML indexing technology to provide users with context-based searching capabilities so that they can access and interact with the most relevant information available, personalized for each user’s individualized needs. For example, one of our customers uses XPS to keep its sales representatives better informed about their customers, prospects and products to enhance revenue opportunities. Another of our customers utilizes XPS to open its information resources to its partners and affiliates in order to broaden their market share. These examples demonstrate the flexibility and versatility of XPS to help our customers aggregate and re-use their information resources to create new e-business solutions. We have received the Microsoft Industry Solutions Award, the Deloitte & Touche Fast 500 Award, the Davies Award of Excellence and the Maryland Technology Fast 50 Award.

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Industry Overview

      The Internet has emerged as a powerful communications and commerce environment for enterprises to share and exchange business information among their employees, customers, suppliers and strategic partners. To succeed in this new environment, enterprises are adopting new Internet-based technologies to re-create themselves as e-businesses. Transforming into an e-business requires enterprises to Internet-enable existing systems, deploy new Internet-based infrastructure technologies and manage the growing volume of information flowing into and out of the enterprise. International Data Corporation, or IDC, estimates that the amount of data stored by enterprises, as indicated by worldwide multi-user disk storage, will increase from approximately 188,000 terabytes in 1999 to more than 1.9 million terabytes in 2003, representing a compound annual growth rate of 78.3%. Enterprises are devoting substantial resources to integrate and utilize this increasing flow of information. IDC estimates that worldwide spending on new Internet-based infrastructure software will grow by 31.0% annually from an estimated $9.4 billion in 1998 to $36.2 billion in 2003. We expect that this spending will be targeted at a variety of e-business strategies including e-commerce, knowledge management, supply chain management, customer support, self-service, procurement and online publishing.

The Sequoia Solution

      With XPS, an enterprise can integrate multiple sources of information into a unified, personalized interface. We believe our comprehensive, integrated, interactive solution represents a fundamentally new approach to doing business and provides our clients with the following benefits:

	•	Streamlined e-Business Processes;
	•	Improved Decision-Making;
	•	Enhanced Revenue Opportunities;
	•	Maximized Return on e-Business Technology Investment;
	•	Flexible, Scalable, XML-based, Open Architecture; and
	•	Secure Information Sharing.

      We believe these aspects of XPS improve productivity, reduce costs, encourage growth, and create a more cost-effective solution for our customers.

The Sequoia Strategy

      Our goal is to be the market leader for XML-based, Internet infrastructure software for creating e-business solutions. Our solution consists of XML-based Internet infrastructure software and services that enable e-businesses to create, deploy and manage interactive portals. The key elements of our business strategy are to:

	•	Maintain and Extend Leadership in XML-based Interactive Portal Software Market;
	•	Expand Product Offerings;
	•	Further Develop Indirect Distribution Channels;
	•	Extend Our Strategic Relationships, Including Our Relationship with Microsoft; and
	•	Leverage Radian Systems’ Customer Base to Enhance Sales of XPS.

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Acquisition

      On July 1, 1999, we acquired Radian Systems, Inc. for an aggregate purchase price of approximately $5.0 million. Radian Systems develops, produces and markets information management software. In 1998, Radian Systems began focusing on XML-based technologies and selected our product as the center of their new product strategy, entering into a business partner agreement with us to resell our XML-based software. With this acquisition, we increased our sales force and customer base and acquired an XML-based technology for the extraction and transformation of database information. Radian Systems’ customers include Blue Cross/ Blue Shield of Minnesota, GE Power Generation and Prudential Insurance. We expect to continue to leverage Radian Systems’ customer relationships to increase our revenue growth.

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The Offering

      The calculation of the number of shares outstanding after this offering is based on the number of shares outstanding on            , 2000 and does not reflect shares that may be issued upon the exercise of options and warrants.

      In addition to the      shares of common stock to be outstanding after this offering, we may issue:

	•	shares under our 2000 Stock Incentive Plan, or our stock option plan, none of which have been granted; and
	•	1,820,919 shares underlying outstanding options as of February 7, 2000 at a weighted average exercise price of $1.28 per share.

      Unless otherwise indicated, all information in this prospectus assumes that:

	•	the over-allotment option granted to the underwriters by us and certain selling stockholders is not exercised;
	•	the conversion of all shares of our outstanding series A, series B, series C, and series D redeemable convertible preferred stock into common stock occurs immediately upon completion of this offering; and
	•	a one-for-four split of our capital stock has been effected.

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Summary Consolidated Financial Data

      The following table summarizes the financial data of our business. On July 1, 1999, we acquired Radian Systems. We accounted for this acquisition using the purchase method of accounting, and the results of operations of Radian Systems are included in our consolidated financial data for the period from July 1, 1999 through December 31, 1999. You should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and related notes and the audited financial statements and related notes of Radian Systems included elsewhere in this prospectus.

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      The following table summarizes consolidated balance sheet data as of December 31, 1999 and as adjusted to give effect to the conversion of our preferred stock into common stock and the receipt of $           in net proceeds from this offering based on an assumed offering price of $     per share. See “Use of Proceeds” and “Capitalization.”

      We have not presented our redeemable convertible preferred stock as part of our stockholders’ equity because it is mandatorily redeemable after November 2004. All of these shares will automatically convert into common stock upon consummation of this offering.

      Sequoia and the Sequoia logo as displayed on the cover of this prospectus are our trademarks. Trademark registration applications are pending for Sequoia XML Portal Server and Xdex. All other trade names, trademarks and service marks used in this prospectus are the property of their respective owners.

Principal Offices

      Our principal executive offices are located at 5457 Twin Knolls Road, Columbia, Maryland 21045 and our telephone number is (410) 715-0206. Our Web site address is www.sequoiasoftware.com. We do not intend for the information on our Web site to constitute part of this prospectus.

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RISK FACTORS

      You should carefully consider the risks described below before buying shares in this offering. If any of the following risks actually occurs, our business could be materially harmed. The trading price of our common stock could decline and you could lose all or part of your investment. You should also refer to other information contained in this prospectus, including our financial statements and related notes and the financial statements of Radian Systems and related notes.

Risks Related to Our Business

We are in an early stage of development and have a limited operating history, and as a result, you may have difficulty evaluating our business and operating results.

      We have a limited operating history and cannot be certain that our business strategy will be successful. We commenced operations in 1992 and commercially released our first XML-based software product in November 1998. An investor in our common stock must consider the risks and uncertainties frequently encountered by early stage companies in new and rapidly evolving markets, including:

	•	our substantial dependence on our XPS software product and related services, from which we expect to derive substantially all of our revenues and which have limited market acceptance to date;
	•	our need to introduce new software products and services to respond to technological and competitive developments and customer needs;
	•	our ability to manage our anticipated growth;
	•	our need to expand our distribution capability through our direct sales organization and through third-party distributors and system integrators;
	•	our ability to respond to competitive developments; and
	•	our dependence on our current executive officers and key employees.

We have a history of losses, we expect future losses, and we may not be profitable or maintain profitability in the future.

      We have incurred substantial net losses in each fiscal quarter since September 30, 1996 and do not expect to achieve profitability in the foreseeable future. For the year ended December 31, 1999, we incurred net losses of approximately $12.8 million and had an accumulated deficit of approximately $26.6 million at December 31, 1999. We cannot assure you that our revenues will grow or that we will achieve or maintain profitability in the future. Given the level of our planned operating and capital expenditures, we expect to incur losses and negative cash flows for the foreseeable future. To increase revenue and achieve profitability, we depend on our ability to continue to, among other things:

	•	increase market acceptance of our product;
	•	develop new products and technologies more rapidly than our competitors;
	•	offer high quality customer service and support;

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	•	attract, integrate, motivate and retain qualified personnel;
	•	successfully implement our distribution strategy;
	•	build our financial and operational infrastructure and otherwise manage growth;
	•	develop and maintain awareness of our brands; and
	•	maintain and establish relationships with strategic partners.

      There can be no assurance that we will successfully implement these strategies. As a result, we may not be able to increase revenue or achieve profitability on a quarterly or an annual basis, which may restrict our ability to pursue our business strategy. Even if we ultimately do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our ability to increase revenue and achieve profitability will be affected by other risks and uncertainties described in this section and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

A significant amount of our business comes from a concentrated group of customers and any decrease in revenue from these customers could have an adverse effect on our business.

      Our top ten customers for the year ended December 31, 1999 accounted for 73.0% of revenues. Blue Cross/ Blue Shield of Minnesota accounted for 23.8% of our revenues for the year ended December 31, 1999 and The State of Texas accounted for 12.2% of our revenues in the same period. We expect that a limited number of customers will continue to represent a material percentage of revenues for the foreseeable future. The loss of a major customer, or fewer or smaller orders by existing customers, could adversely affect our financial condition or results of operations. In addition, any significant delays in or cancellations of a major customer’s development projects or delays in or cancellations of new product announcements and releases by us could result in smaller or canceled orders for our products and could materially affect our financial condition or results of operations.

Our operating results are subject to fluctuations and, if we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.

      Our quarterly revenue and operating results are difficult to predict and are likely to fluctuate significantly from quarter-to-quarter. Our quarterly results of operations have varied in the past, and you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. In some future periods, our results of operations are likely to be below the expectations of public market analysts and investors. In this event, the price of our common stock would likely decline. Factors that have either caused our results to fluctuate in the past or that are likely to affect us in the future include the following:

	•	the size, timing and contractual terms of sales of our products and services due to the unpredictable sales cycle for our products;
	•	technical difficulties in our software that could delay product shipments or increase the costs of introducing new products;
	•	introductions of new products or new versions of existing products by us or our competitors;

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	•	our ability and the ability of our partners to implement products for our customers;
	•	changes in our mix of revenues generated from product sales and services; and
	•	changes in our mix of sales channels through which our products and services are sold.

We depend on our XPS software product and related services and any decrease in revenue from this product and related products and services could have an adverse effect on our business and our financial performance.

      We expect to derive substantially all of our revenues from the sale of our XPS software product and related services. We expect revenues from this product and related products and services to account for substantially all of our revenues for the foreseeable future. As a result, factors adversely affecting the pricing or demand for our XPS software product and related products and services, such as competition and technological change, could materially harm our business. We expect to continue to be dependent on XPS and related products and services in the foreseeable future, and any factor adversely affecting the market for portal software in general, or our software in particular, would adversely affect our ability to generate revenues. Our future financial performance will depend in large part on the successful development, introduction and customer acceptance of our products and product enhancements in a timely and cost effective manner. After the offering, we expect to commit significant resources to market and further develop the XPS software product and related products and services and enhance the brand awareness of XPS. The market for our software may not continue to grow or may grow at a slower rate than we expect. Furthermore, the market may not accept our products and services. If this market fails to grow or grows more slowly than we anticipate, or if the market fails to accept our products and services, our business could suffer.

Capacity restrictions of our software could reduce the demand for and utility of our products.

      The boundaries and capacity of our XPS software, in terms of numbers of concurrent users or interactions, are unknown because, to date, no customer or testing environment has reached these boundaries. The capacity boundaries of XPS may, at some future time, be reached and, when reached, may be insufficient to enable some of our customers to achieve their desired levels of information aggregation and interaction. We may lose customers or fail to gain new customers if the capacity boundary of XPS limits the ability of our customers to achieve expected levels of information aggregation and interaction.

Our failure to obtain or maintain third-party licenses could harm our business.

      We currently, and expect to continue to, incorporate into our pre-packaged software certain third-party software that enables the implementation of our products. In addition, we license certain software technology used to develop our software. The loss or inability to maintain any of these software licenses could result in delays or reductions in product shipments until equivalent software could be identified and licensed or compiled, which could adversely affect our business.

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Our failure to manage our growth could adversely affect our business.

      The planned expansion of our operations will place a significant strain on our management, financial controls, operations systems, personnel and other resources. Our ability to manage our future growth, should it occur, will depend in large part upon a number of factors including our ability to rapidly:

	•	build and train our sales and marketing staff to create an expanding presence in the rapidly evolving interactive e-business portal market, and keep them fully informed over time regarding the technical features, issues and key selling points of our products;
	•	develop our customer support capacity as sales of our products grow, so that we can provide customer support without diverting engineering resources from product development efforts; and
	•	expand our internal management and financial controls significantly, so that we can maintain control over our operations and provide support to other functional areas within Sequoia as the number of our personnel and size of our organization increases.

The variable sales cycles of our products could cause significant fluctuation in our quarterly results, which could result in volatility in the price of our stock.

      The typical sales cycle of our software is unpredictable and generally involves a significant commitment of resources by our customers. A customer’s decision to license our software generally involves the evaluation of the available alternatives by a significant number of personnel in various functional and geographic areas and is subject to delays over which we may have little or no control, including budgeting constraints, internal purchase review procedures and the inclusion or exclusion of our products on customers’ approved standards list. Accordingly, we typically must expend substantial resources educating prospective customers about our software solutions. Therefore, the length of time between the date of initial contact with the potential customer and the execution of a software license agreement typically ranges from three to six months and is subject to delays over which we may have little or no control. This cycle may lengthen in the future. As a result, our ability to predict the timing and amount of specific sales is limited and any delay or failure to complete one or more large transactions could have a material adverse effect on our business and could cause operating results to vary significantly from quarter-to-quarter, which could result in volatility in our stock price.

XPS is based in large part on XML, which has not yet achieved broad market acceptance and, if broad market acceptance for XML does not develop, our business could be harmed.

      XPS is intrinsically-based in large part upon XML, or eXtensible Markup Language, an emerging standard for sharing data over the Internet. While we anticipate that XML will achieve broad market acceptance in the near future, it is possible that a competing standard perceived to be superior could replace XML, in which case the market may not accept an XML-based product. If a new standard were perceived to be superior, our software might not be compatible with the new standard or we might not be able to develop a product using this standard in a timely manner. Consequently, a failure of XML-based products to achieve

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Our software products rely on our intellectual property, and any failure by us to protect our intellectual property could enable our competitors to market products with similar features that may reduce demand for our products.

      Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as those in the United States. Our success and ability to compete depend substantially upon our internally developed technology, which is incorporated in the source code for our products. We protect our intellectual property through a combination of patent, copyright, trade secret and trademark law. We presently have two patent applications and one provisional patent application pending in the United States. We have two trademark registrations and two trademark applications pending in the United States. In addition, Radian Systems, our wholly owned subsidiary, has three intent-to-use trademark applications and one trademark application pending in the United States. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to our source code and other intellectual property and the distribution of our software, documentation and other proprietary information. These measures afford only limited protection and may be inadequate. Others may develop technologies that are similar or superior to our technology or design around the copyrights and trade secrets we own.

Our products employ technology that may infringe the proprietary rights of others, and we may be liable for significant damages as a result.

      We expect that software products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments grows and overlaps. We believe that our products do not employ technology that infringes any proprietary rights of third parties. Nevertheless, third parties may claim that we infringe their intellectual property rights. Regardless of whether these claims have any merit, they could:

	•	be time-consuming to defend;
	•	result in costly litigation;
	•	divert our management’s attention and resources;
	•	cause product shipment delays; or
	•	require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all.

      A successful claim of product infringement against us or our failure or inability to license the infringed or similar technology could damage our business because we would not

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Our software products are complex and may contain unknown defects that could harm our reputation, result in product liability or decrease market acceptance of our products.

      Our software products are complex, and may contain undetected errors or result in failures, which are not detected until after commencement of commercial shipments. Any of these errors could be significant and could harm our business and ongoing results. Any significant errors may result in:

	•	costly litigation;
	•	diversion of management’s attention and resources;
	•	damage to our reputation;
	•	increase in our product development costs;
	•	loss of sales; or
	•	delay in market acceptance of our products.

      In addition, the sale and support of our products may entail the risk of product liability or warranty claims based on damage incurred by our customers due to such errors or failures. In addition, the failure of our products to perform to customer expectations could give rise to warranty claims. Although we carry general liability insurance, our current insurance coverage may be insufficient to protect us from all liability that may be imposed under these types of claims.

Intense competition and consolidation in our industry could create stronger competitors and harm our business.

      The market for our products is intensely competitive, highly fragmented, characterized by rapid technological change and significantly affected by new product introductions. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, a broader range of products to offer and a larger installed base of customers than us, any of which could provide them with a significant competitive advantage.

      We expect to face increased competition in the future from our current competitors. In addition, new competitors, or alliances among existing and future competitors, may emerge and rapidly gain significant market share. We also may face increased competition from existing large business application software vendors that may broaden their product offerings to include portal software. Their significant installed customer bases and abilities to offer a

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	•	other vendors of software that provide e-business interactive portal software solutions;
	•	developers of software that address only certain technology components of portal software (e.g., enterprise application integration); and
	•	in-house development efforts by potential clients or partners.

We need to expand our sales and distribution capabilities.

      We need to substantially expand our direct and indirect sales and distribution efforts, both domestically and internationally, in order to increase market awareness and sales of our software and services. We continue to expand our direct sales force and plan to hire additional sales personnel. Competition for qualified sales and marketing personnel is intense, and we might not be able to hire and retain adequate numbers of such personnel to maintain our growth. We also plan to expand our relationships with system integrators, enterprise software vendors and other third-party resellers to further develop our indirect sales channel. As we continue to develop our indirect sales channel, we will need to manage potential conflicts between our direct sales force and third-party reselling efforts.

Our revenues could decline if we do not develop and maintain successful relationships with indirect sales channel partners, including systems integrators and complementary technology vendors.

      We pursue business alliances with indirect channel partners to endorse our products, implement our software, provide customer support services, promote and resell products that integrate with our products and develop industry-specific software products. These alliances provide an opportunity to license XPS to our partners’ installed customer bases. In many cases, these parties have established relationships with our existing and potential customers and can influence the decisions of these customers. We rely upon these companies for recommendations of our products and related services during the evaluation stage of the purchasing process, as well as for implementation and customer support services. A number of our competitors have stronger relationships with indirect channel partners who, as a result, may be more likely to recommend our competitors’ products and services. In addition, some of our competitors have relationships with a greater number of these indirect channel partners and, therefore, have access to a broader base of customers. If we are unable to establish, maintain and strengthen these relationships, we will have to devote substantially more resources to the selling and marketing, implementation and support of our products. Our efforts may not be as effective as these indirect channel partners, which could significantly harm our operating results.

The development of international operations will cause us to face additional risks.

      We intend to expand our international sales efforts in the future. We have very limited experience in marketing, selling and supporting our software and services abroad. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources. Although currently our international presence is not material, if we are unable to grow our international operations successfully

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	•	unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
	•	restrictions on repatriation of earnings;
	•	differing intellectual property rights;
	•	differing labor regulations;
	•	changes in a specific country’s or region’s political or economic conditions;
	•	greater difficulty in staffing and managing foreign operations; and
	•	fluctuating currency exchange rates.

If we are unable to attract and retain key management and personnel, our business may suffer.

      We depend to a significant degree on the skills, experience and efforts of our key executive officers and our employees, including without limitation: Richard C. Faint, Jr., our chairman of the board and chief executive officer; Mark A. Wesker, our president and chief operating officer; Gregory G. Heard, our chief financial officer who joined us in January 2000; Kenneth E. Tighe, our executive vice president of sales, the members of our research and development staff and a number of other key management, sales, support, technical and services personnel. Qualified personnel are in great demand throughout the software industry, and our future success depends in large part on our ability to attract, train, motivate and retain highly skilled employees and the ability of our executive officers and other members of senior management to work effectively as a team. The loss of the services of any executive officer or the failure to attract and retain the highly trained technical personnel that are integral to our sales, product development, service and support teams, could have a material adverse effect on our business.

If we undertake acquisitions, they may be expensive and disruptive to our business and could have an adverse effect on our business, future operations and stock price.

      We may from time to time purchase or make investments in companies, products or technologies that differ from our core business. If we purchase a company, we could have difficulty in assimilating that company’s technologies, employees and operations. In addition, the key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. We also expect that we would incur substantial expenses if we acquired other businesses or technologies. Furthermore, we may use the proceeds of this offering, incur debt or issue equity securities to pay for any future acquisitions. If we issue additional equity securities, our stockholders could experience dilution and the market price of our stock may decline. We currently have no agreements or understandings regarding any future acquisitions.

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We may need significant additional funds which we may not be able to obtain.

      We may require additional capital to finance our growth or to fund acquisitions or investments in complementary businesses, technologies or product lines. This additional financing may not be available to us on a timely basis if at all, or, if available, on terms acceptable to us. Moreover, additional financing may cause dilution to existing stockholders.

All Year 2000 problems may not have been addressed by our suppliers and any service interruption we experience as a result of these problems may cause us to lose customers.

      The Year 2000 issue generally describes the various problems that may result from the improper processing of dates and date-sensitive transactions by computers and other equipment as a result of computer hardware and software using two digits, rather than four digits, to identify the year in a date. Any computer programs or systems of our suppliers that have date-sensitive software may recognize a date using “00” as the year 1900 rather than the year 2000. While we have experienced no Year 2000 issues to date, and we are not aware of any material issues for our suppliers, we are continuing to evaluate and determine whether our significant suppliers are in compliance or have appropriate plans to remedy Year 2000 issues when their systems interact with our systems. We do not expect that this will have a material impact on our operations. However, there can be no assurance that the systems of other companies on which we rely are Year 2000 compliant, that another company’s failure to successfully convert, or that another company’s conversion to a system incompatible with our systems, would not have an impact on our operations. The failure of our principal suppliers to be Year 2000 compliant could result in delays in service deliveries from those suppliers and materially impact our ability to do business.

      In addition, our customers’ and their business partners’ hardware operating systems and other software applications must operate effectively for them to use our software effectively. If these systems or applications are not Year 2000 compliant, our customers and their business partners may not be able to use our software. We cannot predict the extent to which our customers’ and their business partners’ systems and application are Year 2000 compliant, and our business, operating results and financial condition could be harmed.

Risks Related to Our Industry

The markets in which we compete are undergoing rapid changes, and our failure to keep up with such changes could adversely affect our business.

      The markets for our products and services are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product introductions and improvements. We expect that the rapid evolution of Internet-based applications and standards as well as general technology trends such as changes in or introductions of operating systems, will require us to adapt our software products to remain competitive. Our future success will depend, in part, on our ability to:

	•	develop or acquire new products and services that meet changing customer needs;
	•	improve our existing products and services;

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	•	continue to develop our strategic and technical expertise;
	•	advertise and market our products and services; and
	•	influence and respond to emerging industry standards and other changes.

      This must be accomplished in a timely and cost-effective manner. We must also be able to support a range of changing computer software, hardware platforms and customer preferences. There can be no assurance that we will be able to successfully develop new products to address new industry standards and customer needs, respond to technological developments, or develop solutions to satisfy our customers. Our inability to respond timely and successfully to technological developments and changes could hurt our competitive position or render our products or technologies noncompetitive or obsolete.

We depend on the speed and reliability of the Internet and our customers’ internal networks.

      The recent growth in Internet traffic has caused frequent periods of decreased performance for many Internet users. If Internet usage continues to grow rapidly, its infrastructure may not be able to support these demands and its performance and reliability may decline. If outages or delays on the Internet occur frequently or increase in frequency, e-business could grow more slowly or decline, which may reduce the demand for our software. The ability of our products to satisfy our customers’ needs is ultimately limited by and depends upon the speed and reliability of both the Internet and our customers’ internal networks. Consequently, the emergence and growth of the market for our software depends upon improvements being made to the entire Internet as well as to our customers’ networking infrastructures to alleviate overloading and congestion. If these improvements are not made, the ability of our customers to utilize our solution will be hindered, and our business, operating results and financial condition may suffer.

Internet-related laws could adversely affect our business.

      Regulation of the Internet is largely unsettled. It may take years to determine whether and how existing laws including those governing intellectual property, privacy, libel and taxation apply to the Internet. The adoption of laws or regulations that increase the costs or administrative burdens of doing business using the Internet could cause companies to seek an alternative means of transacting business. If the adoption of new Internet laws or regulations causes companies to seek alternative methods for conducting business, the demand for our software could decrease and our business could be adversely affected.

Increased security risks of e-business may deter future use of our software and services.

      A fundamental requirement for e-business is the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the security features contained in our software or the algorithms used by our customers and their business partners. This could make it difficult to protect content and transactions on Internet e-commerce marketplaces or proprietary information in our customers’ and their business partners’ databases. Anyone who is able to circumvent security measures could misappropriate proprietary, confidential customer information or cause interruptions in our

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Lack of growth or decline in Internet usage or the lack of acceptance of Internet commerce could adversely affect our business.

      Our products enhance companies’ ability to transact business and conduct operations utilizing the Internet. Therefore, our future success will depend substantially upon the widespread acceptance and use of the Internet as an effective medium for commerce by consumers, business and business applications. Rapid growth in the use of the Internet and other online services is a recent development and we are unsure whether that acceptance and use will continue to develop or that a sufficiently broad base of consumers will adopt and continue to use the Internet and other online services as a medium of commerce. To be successful, we must rely on consumers and businesses, who have historically used traditional means of commerce to purchase products, accepting and utilizing new ways of conducting business and exchanging information over the Internet.

      In addition, the Internet may not be accepted as a viable commercial marketplace for a number of reasons, including:

	•	potentially inadequate development of the necessary network infrastructure;
	•	delayed development of enabling technologies and Internet performance improvements;
	•	actual or perceived lack of security of information;
	•	lack of access and ease of use;
	•	inconsistent quality of service and lack of availability of cost-effective, high speed service;
	•	excessive governmental regulation; and
	•	uncertainty regarding intellectual property rights.

      If, for these reasons or others, the Internet does not become a viable and substantial commercial medium, our business would be harmed.

Risks Related to This Offering

Our management has broad discretion over the use of proceeds from this offering, which could adversely affect our business.

      We intend to use the proceeds of the offering to fund ongoing operations, to fund possible future acquisitions and to fund the costs of developing our products and services, as

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Our executive officers and directors are able to exercise significant influence over our company, which could adversely affect our business and depress our stock price.

      After this offering, our executive officers and directors will continue to control approximately % of our common stock and will exercise significant influence over stockholder voting matters which will limit the influence of our new stockholders. If our officers and directors act together, they will be able to influence the composition of the board of directors and will continue to have significant influence over our affairs in general.

After the offering, some of our stockholders may be able to control all matters submitted for stockholder approval, and you will be subject to their decisions.

      Some of our stockholders own a large enough stake in us to have a significant influence on the matters presented to stockholders. As a result, these stockholders may be able to control all matters requiring stockholder approval, including the election and removal of directors, the approval of significant corporate transactions, such as any merger, consolidation or sale of all or substantially all of our assets, and the control of our management and affairs. Accordingly, that concentration of ownership may delay, defer or prevent a change of control of our company, impede a merger, consolidation, takeover or other business combination involving our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, any of which could have a material adverse effect on the market price of our common stock. See our discussion under the caption “Principal Stockholders” for more information regarding ownership of our outstanding shares.

Investors will experience immediate and substantial dilution of $           in the book value of their investment.

      If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the public offering price when they purchased their shares. You will experience additional dilution upon the exercise of stock options and warrants to purchase common stock.

Our stock does not have a trading history and may be extremely volatile because we operate in a rapidly changing industry.

      The trading price of our common stock is likely to be volatile. The stock market has experienced extreme volatility and this volatility has often been unrelated to the operating performance of particular companies. We cannot be sure that an active public market for our common stock will develop or continue after this offering. Investors may not be able to sell their common stock at or above our initial public offering price or at all. Prices for the

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Future sales of our common stock may lower our stock price.

      If our existing stockholders sell a large number of shares of our common stock, the market price of the common stock could decline significantly. The perception in the public market that our existing stockholders might sell shares of common stock could depress our market price. Immediately after this offering, approximately            shares of our common stock will be outstanding.

      Of these shares,            of the shares included in this offering will be available for immediate resale in the public market. The remaining            shares, or      % of our total outstanding shares, will become available for resale in the public market as shown on the chart below. All of these remaining    shares are subject to lock-up agreements restricting the sale of such shares for 180 days from the date of this prospectus. However, the underwriters may waive this restriction and allow these stockholders to sell their shares at any time.

We have implemented certain anti-takeover provisions.

      At the time we complete this offering, our charter and our bylaws, in conjunction with Maryland law, will contain provisions that could make it more difficult for a third-party to obtain control of Sequoia even if doing so would be beneficial to stockholders. For example, our charter will provide for a classified board of directors and give the board of directors the ability to expand its size and fill any vacancies without stockholder approval.

Forward-looking statements are inherently uncertain.

      We make forward-looking statements in the “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections and elsewhere in this prospectus. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations, intentions and assumptions and other statements that are not historical facts. We generally intend the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions to identify forward-looking statements.

      Because these forward-looking statements involve risks and uncertainties, including those described in this “Risk Factors” section, our actual results may differ materially from those expressed or implied by these forward-looking statements.

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USE OF PROCEEDS

      We estimate the net proceeds from the offering to be approximately $      million at an initial public offering price of $     per share and after deducting the underwriting discount and estimated offering expenses. We will not receive any proceeds from the sale of shares by the selling stockholders if the underwriters’ over-allotment option is exercised. While we have not determined the specific allocation of the net proceeds of this offering, we currently intend to use the net proceeds to fund the development of our products and services, to expand our sales force and sales office locations and to fund other general corporate expenses including operating losses. As of the date of this prospectus, we cannot specify all of the particular uses for the general corporate purposes portion of our proceeds. Accordingly, our management will have broad discretion in the application of the net proceeds.

      As part of our strategy, we may make acquisitions and a portion of the net proceeds from the offering may be used for such purposes. We have no definitive agreement with respect to any acquisition, although we regularly engage in discussions with other companies and assess opportunities on an ongoing basis. We may be required to obtain additional financing to fund the development of our products and services if, among other reasons, we use a portion of the proceeds from the offering to fund acquisitions, or if our plans or projections change or prove to be inaccurate. We cannot assure you that such additional financing will be available on terms acceptable to us or at all.

      We intend to invest any remaining proceeds from the offering in short-term, interest bearing, investment grade marketable securities.

DIVIDEND POLICY

      We have never paid cash dividends on our common stock nor do we have plans to do so in the foreseeable future. The declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements and overall financial condition. In addition, our ability to declare and pay dividends is substantially restricted under our loan agreements with Silicon Valley Bank.

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CAPITALIZATION

      The following table sets forth our capitalization as of December 31, 1999:

	•	on an actual basis;
	•	on a pro forma basis to give effect to the automatic conversion of all outstanding shares of preferred stock into shares of common stock, effective upon the closing of this offering; and
	•	on a pro forma as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of             shares of common stock in this offering at an assumed initial public offering price of $     per share and after deducting the estimated underwriting discount and offering expenses payable by us.

      Please read the capitalization table together with the sections of this prospectus entitled “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements of Sequoia and Radian Systems included in this prospectus.

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      We expect there to be             shares of our common stock outstanding after the offering. In addition to these shares, we may issue additional shares of our common stock under the following plans and arrangements:

	•	1,647,669 shares of common stock reserved for issuance upon the exercise of outstanding options as of December 31, 1999 at a weighted average exercise price of $0.69 per share;
	•	390,286 additional shares of common stock authorized for granting as stock options by the board of directors as of December 31, 1999;
	•	312,952 shares of common stock reserved for issuance upon the exercise of warrants for series C redeemable convertible preferred stock at a weighted average exercise price of $4.11 per share and conversion of shares of series C redeemable convertible preferred stock to an equal number of shares of common stock;
	•	1,704,311 shares of common stock reserved for issuance upon the exercise of warrants for series D redeemable convertible preferred stock at a weighted average exercise price of $4.50 per share and conversion of shares of series D redeemable convertible preferred stock shares to an equal number of shares of common stock;
	•	222,303 shares of common stock reserved for issuance upon the exercise of warrants to purchase common stock at a weighted average exercise price of $4.50 per share; and
	•	shares of common stock reserved for issuance under our 2000 Stock Incentive Plan.

      We have not presented our series A, series B and series C redeemable convertible preferred stock as part of our stockholders’ equity because they are mandatorily redeemable after November 2004. All of these shares will automatically convert into common stock upon consummation of this offering.

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DILUTION

      You will experience immediate and substantial dilution in the net pro forma tangible book value per share of your common stock.

      We calculate dilution to new investors by subtracting pro forma net tangible book value per share of common stock after this offering from the per share price paid by new investors in this offering. We calculate net pro forma tangible book value per share by subtracting liabilities from total tangible assets and then dividing that number by the number of shares of common stock outstanding at December 31, 1999, after giving effect to the automatic conversion of preferred stock upon consummation of this offering. The following table illustrates the per share dilution to investors in this offering:

      The following table summarizes on a pro forma basis as of December 31, 1999, after giving effect to this offering, the number of shares of common stock purchased from us, the total consideration paid to us and the average consideration paid per share by existing stockholders and by new investors in this offering:

      The calculations on this page are based on shares outstanding as of December 31, 1999. These calculations exclude from the number of outstanding shares of common stock:

	•	1,647,669 shares of common stock reserved for issuance upon the exercise of outstanding options as of December 31, 1999 at a weighted average exercise price of $0.69 per share;
	•	390,286 additional shares of common stock authorized for granting as stock options by the board of directors as of December 31, 1999;
	•	312,952 shares of common stock reserved for issuance upon the exercise of warrants for series C redeemable convertible preferred stock at a weighted average exercise price of $4.11 per share and conversion of shares of series C redeemable convertible preferred stock to an equal number of shares of common stock;
	•	1,704,311 shares of common stock reserved for issuance upon the exercise of warrants for series D redeemable convertible preferred stock at a weighted average exercise

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		price of $4.50 per share and conversion of shares of series D redeemable convertible preferred stock to an equal number of shares of common stock;
	•	222,303 shares of common stock reserved for issuance upon the exercise of warrants for common stock at a weighted average exercise price of $4.50 per share; and
	•	shares of common stock reserved for issuance under our 2000 Stock Incentive Plan.

      If all of the options and warrants outstanding as of December 31, 1999 had been exercised at that date, dilution to new investors in this offering would be $     per share.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

      The following table presents the selected historical consolidated financial data of our business. The consolidated financial data for 1995 have been derived from our unaudited consolidated financial statements. The consolidated financial data for 1996 have been derived from, and are qualified by reference to, our audited financial statements. The financial data for 1997, 1998 and 1999 have been derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus.

      On July 1, 1999, we acquired Radian Systems. We accounted for this acquisition using the purchase method of accounting, and the results of operations of Radian Systems are included in our consolidated financial data for the period from July 1, 1999 through December 31, 1999.

      You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and related notes, and the audited financial statements and related notes of Radian Systems included elsewhere in this prospectus.

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      We have not presented our redeemable convertible preferred stock as part of our stockholders’ equity because it is mandatorily redeemable after November 2004. All of these shares will automatically convert into common stock upon consummation of this offering.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

      The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Historical Consolidated Financial Data” and our consolidated financial statements and the financial statements of Radian Systems and related notes contained elsewhere in this prospectus. Certain information contained in the discussion and analysis set forth below and elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risk and uncertainties. In evaluating such statements, prospective investors should specifically consider the various factors identified in this prospectus that could cause results to differ materially from those expressed in such forward-looking statements including matters set forth in “Risk Factors.”

Overview

      We are a leading provider of XML-based Internet infrastructure software for creating interactive e-business portals. Interactive portals are a new generation of e-business solutions that are designed to tap into today’s vast corporate and Internet information reservoirs in order to bring the right information to the right people at the right time. This new type of XML-based information portal is distinctively capable of intelligently aggregating data and content from disparate sources, personalizing that information based upon a user’s profile, and enabling the user to interact with the original information source. These capabilities meet a growing need for software products that can sift through the increasing volumes of corporate and Internet-based information to identify and facilitate new e-business opportunities. From corporate intranets and extranets to Internet-based content and commerce providers, our products address a growing demand for a new breed of dynamic, flexible and standards-based e-business software that brings information and people together.

      Sequoia Software was founded in March 1992. During the period from our inception to 1996, we generated revenues primarily from developing custom software products that provided information management functionality to our customers. Beginning in early 1996, we saw potential for a new generation of software, based on Internet standards and designed to bring the right information to the right people at the right time. By early 1998, we had transitioned our business model from custom information technology products and services to pre-packaged, XML-based software licensing, professional services and maintenance. This transition is reflected in our financial results and should be considered when performing historical comparisons. We commercially released our first XML-based software product in November 1998, and we released XPS in March 1999. We released a subsequent version of XPS in December 1999. We have grown from 56 employees as of December 31, 1998 to 152 employees as of December 31, 1999.

      On July 1, 1999, we acquired Radian Systems for an aggregate purchase price of approximately $5.0 million in cash and stock. We accounted for the acquisition using the purchase method of accounting. As such, the results of operations of Radian Systems have been included in our results of operations beginning July 1, 1999, and the acquired net assets were recorded at their estimated fair value on July 1, 1999. We recorded approximately

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      We derive our revenues from software licenses, maintenance and services. In addition, we have previously sold hardware purchased from third parties for the convenience of our customers. Licenses for our software typically contain multiple elements, including the product license, maintenance and other services. We allocate the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on specific objective evidence.

      License revenues include fees from the sale of our XPS software as well as third party software. Certain software that we have developed is licensed under contractual arrangements that, in addition to the delivery of software, require significant modification and customization of the software. These arrangements are accounted for using the percentage of completion method, with progress to completion measured based on labor costs incurred.

      Sales of our software and third-party software are recognized when persuasive evidence of an arrangement exists, delivery has occurred, and the fee is fixed or determinable and probable of collection. Software license fees billed and not recognized as revenue are included in deferred revenue.

      Our services include installation, basic consulting, as well as software customization and modification to meet specific customer needs. Service fees that are provided under long-term contracts to install and customize our software or third-party software are recognized using the percentage of completion method. Progress to completion is measured using costs incurred compared to estimated total costs, or contract milestones.

      Our maintenance includes telephone support, bug fixes, and rights to upgrades on a when and if available basis associated with software licenses. These fees are collected in advance and recognized ratably over the maintenance period. Unrecognized maintenance fees are included in deferred revenues.

      We sell hardware purchased from third parties as a convenience to our customers. These revenues are recognized when the hardware is shipped. We expect that the sale of hardware will not continue to be a material part of our operations as we transition our business model from custom information technology products and services to pre-packaged software licensing, services and maintenance.

      Our cost of license revenues includes expenses pertaining to manufacturing, packaging and distributing our products and related documentation. In the year ended December 31, 1999, as a result of our acquisition of Radian Systems, our cost of license revenues also included the cost of purchased third-party licenses sold to our customers. Cost of license revenues also includes the amortization of capitalized software development costs. Our cost of services and maintenance includes salaries and related expenses for our expert product services organization, costs of third-party consultants, and an allocation for overhead and recruitment.

      Research and development expenses consist of new software development and the costs associated with our in-house development staff. The costs associated with this in-house

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      Sales and marketing expenses consist of salaries and related costs, as well as direct marketing costs, including trade shows, public relations, advertising, marketing materials and market research. We currently license our products primarily through our direct sales force. Additionally, we focus on working with our indirect channel partners, as well as identifying new indirect channel partners. These costs are expensed as incurred.

      General and administrative expenses include our personnel and other costs associated with management, finance, human resources and information services activities. We intend to hire a significant number of employees in the future. This expansion places significant demands on our management and operational resources. To manage our rapid growth and increased demand, we must invest in and implement scalable operating systems, procedures and controls. We expect future expansion to continue to challenge our ability to hire, train, manage and retain qualified employees. These costs are expensed as incurred.

      Since our inception, we have incurred substantial costs to develop our technology and products, to recruit and train personnel for our research and development, sales and marketing and professional services departments and to establish an administrative infrastructure. As a result, as of December 31, 1999, we had an accumulated deficit of $26.6 million after accretion of our redeemable convertible preferred stock. We believe our success depends on rapidly increasing our customer base, further developing XPS and introducing new product enhancements into the marketplace. We intend to continue to invest heavily in research and development and sales and marketing. We therefore expect to continue to incur substantial operating losses for the foreseeable future.

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Results of Operations

      The following table sets forth consolidated statement of operations data for each of the periods indicated as a percentage of total revenues:

Years Ended December 31, 1999 and 1998

      Revenues. Total revenues increased 109.3% to $8.4 million in 1999 from $4.0 million in 1998. The increase in revenues was due primarily to an increase in the number of new customers to 43 customers in 1999 from 13 customers in 1998, accounting for $7.1 million or 84.5% of total revenues in 1999.

      License revenues increased 653.4% to $4.3 million in 1999 from $575,000 in 1998. The increase in license revenues was due to the first full year of commercial availability of XPS. License revenues for XPS increased to $1.5 million in 1999 from $200,000 in 1998. The remaining increase in license revenues was due to the addition of the existing customer base of Radian Systems which we acquired on July 1, 1999.

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      Services and maintenance revenues increased 38.1% to $3.3 million in 1999 from $2.4 million in 1998. The increase in services and maintenance revenues was attributable primarily to an increase in services and support provided in connection with increasing license sales and the growth of our customer base.

      Hardware revenues decreased 29.0% to $719,000 in 1999, from $1.0 million in 1998. Historically, hardware was provided at the request of customers in conjunction with long-term contracts to customize software. We do not expect hardware to be a material component of our business model.

      Cost of Revenues. Cost of license revenues increased 1,290.5% to $2.4 million in 1999 from $173,000 in 1998 due to increased license revenues. Our cost of license revenues increased at a faster rate than our license revenues due to the product mix resulting from our acquisition of Radian Systems.

      The cost of services and maintenance revenues increased 46.1% to $2.7 million in 1999 from $1.9 million in 1998. The increase was due primarily to providing these services in conjunction with increasing license sales.

      The cost of hardware revenues increased 21.0% to $922,000 in 1999 from $762,000 in 1998. In 1999, we incurred a loss on the sale of hardware in conjunction with a long-term contract.

      Gross Profit. Gross profit increased 94.0% to $2.3 million in 1999 from $1.2 million in 1998. As a percentage of total revenues, gross profit decreased to 27.6% in 1999 from 29.8% in 1998, primarily due to a change in our license revenue mix stemming from our acquisition of Radian Systems.

  Operating Expenses

      Research and Development. Research and development expenses increased 266.8% to $3.6 million in 1999 from $991,000 in 1998. The increase was attributable primarily to the addition of 31 personnel in our research and development department.

      Sales and Marketing. Sales and marketing expenses increased 202.5% to $6.8 million in 1999 from $2.3 million in 1998. The increase was primarily attributable to hiring 52 sales and marketing and customer support employees, as well as costs associated with the sales and marketing of our products.

      General and Administrative. General and administrative expenses increased 335.1% to $3.5 million in 1999 from $806,000 in 1998. The increase was due primarily to hiring 7 administrative personnel. In addition, we recognized a $621,000 inventory impairment as a result of obsolescence in 1999. We also recognized $200,000 of compensation expense related to the issuance of stock options in 1999 and $636,000 of amortization expense related to intangible assets recorded in connection with our acquisition of Radian Systems.

      Bad Debt Expense. Bad debt expense increased 3,345.0% to $651,000 in 1999 from $19,000 in 1998. The increase in bad debt expense resulted principally from bad debt expense we recognized in connection with a long-term subcontract arrangement to provide software customization and related services. We recorded $434,000 of bad debt expense

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      Net Interest Expense. Net interest expense increased 519.2% to $491,000 in 1999 from $79,000 in 1998. The increase in net interest expense was due primarily to increases in borrowings to finance our operations and to acquire Radian Systems.

Years Ended December 31, 1998 and 1997

      Revenues. Total revenues increased 9.1% to $4.0 million in 1998 from $3.7 million in 1997.

      License revenues increased 36.2% to $575,000 in 1998 from $422,000 in 1997. This increase was due primarily to the first installations of our initial XML-based product, which we commercially released in November 1998.

      Services and maintenance revenues decreased 14.0% to $2.4 million in 1998 from $2.8 million in 1997. This decrease was primarily attributable to a shift in our efforts from custom software development to licensing pre-packaged software. This decrease was partially offset by the receipt of $1.1 million in 1998 and $215,000 in 1997 from the National Institute of Standards and Technology, a division of the U.S. Department of Commerce, for development of an XML-based technology for aggregating health care data from disparate sources.

      Hardware revenues increased 131.5% to $1.0 million in 1998 from $438,000 in 1997. This increase was primarily attributable to the increase of one component of a contract with a significant customer.

      Cost of Revenues. Cost of license revenues remained unchanged in terms of dollars, but decreased as a percentage of total license revenues to 30.1% in 1998 from 40.8% in 1997. This decrease was due to a shift in our efforts from custom software development to licensing pre-packaged software.

      Cost of services and maintenance revenues increased 41.3% to $1.9 million in 1998 from $1.3 million in 1997. The increase in dollars and percentage of revenue is the result of a cost sharing contract with National Institute of Standards and Technology, a division of the U.S. Department of Commerce.

      Cost of hardware revenues increased 137.7% to $762,000 in 1998 from $321,000 in 1997, but remained constant as a percentage of hardware revenue. This increase was

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      Gross Profit. Total gross profit decreased 35.5% to $1.2 million in 1998 from $1.9 million in 1997. The decrease was attributable primarily to the increase in the cost of services and maintenance revenues resulting from the contract with the National Institute of Standards and Technology.

  Operating Expenses

      Research and Development. Research and development expenses increased 81.8% to $991,000 in 1998 from $545,000 in 1997. The increase was attributable primarily to the addition of 6 personnel in our research and development department.

      Sales and Marketing. Sales and marketing expenses increased 90.1% to $2.3 million in 1998 from $1.2 million in 1997. The increase was attributable primarily to hiring 7 sales and marketing and customer support employees, as well as costs associated with the sales and marketing of our products.

      General and Administrative. General and administrative expenses increased 25.6% to $806,000 in 1998 and from $642,000 in 1997. The increase was due primarily to hiring 5 administrative personnel.

      Net Interest Expense. Net interest expense increased 265.3% to $79,000 in 1998 from $20,000 in 1997. The increase in net interest expense was due primarily to the issuance of convertible promissory notes and long-term debt to finance our operations.

Selected Quarterly Results of Operations

      The following table sets forth our unaudited quarterly results of operations for each of the four quarters in the year ended December 31, 1999, as well as the percentage of our total revenues represented by each item indicated. We derived this data from our unaudited financial statements, and, in our opinion, they include all adjustments necessary to present fairly the financial results for the periods. Results of operations for any previous fiscal quarter do not necessarily indicate what results may be for any future period.

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