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FORM S-1

ENTERWORKS, INC.

19886 Ashburn Road

John B. Wood

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, 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

(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act.

      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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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the 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 jurisdiction where the offer or sale is not permitted.

Subject to completion                           , 2000

New Enterworks Logo

________________________________________________________________________________
    Shares

	Common Stock

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	This is the initial public offering of Enterworks, Inc. We are offering                shares of our common stock. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol “EWKS.”
	Investing in our common stock involves risks. See “Risk Factors” beginning on page 4.
	Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

	We have granted the underwriters the right to purchase up to                additional shares to cover any over-allotments.
	Deutsche Banc Alex. Brown
	J.P. Morgan & Co.
	Wit SoundView
	The date of this prospectus is              , 2000.

DESCRIPTION OF GRAPHICS FOR FRONT-INSIDE COVER

DESCRIPTION OF GRAPHICS FOR BACK-INSIDE COVER

[GRAPHICS]

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PROSPECTUS SUMMARY

      This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the “Risk Factors” and the financial statements, before making an investment decision.

      We develop, market and support a software framework that integrates content and processes for companies seeking to participate in e-business. We target operators and users of e-marketplaces and portals. E-marketplaces and portals are Web-based destinations where employees, customers, partners and suppliers can interact to obtain information about products and services, and conduct business more efficiently. Our products enable customers to build or join e-marketplaces and portals rapidly, add new content and e-business participants easily, and automate the end-to-end processes required for e-business interaction.

      Forrester Research estimates the annual value of business-to-business products and services that will be sold over the Internet in the United States will exceed $2.7 trillion by 2004, and that 53% of that value will be processed through e-marketplaces. In addition, industry studies indicate that many companies are implementing their own enterprise information portals. However, companies building or participating in e-marketplaces and portals face several business and technical challenges. The speed of change in today’s business environment requires e-business systems to be flexible and scalable. Business processes must integrate enterprise employees, customers, partners and suppliers. In addition, content from multiple disparate systems must be integrated and presented to users in a single view.

      Our products are designed to meet the business and technical challenges faced by operators and users of e-marketplaces and portals by delivering integrated, real-time content and automating business processes that bring together employees, customers, partners and suppliers. Our products offer numerous competitive advantages over traditional solutions by combining both content and process integration, and by guiding people through e-business interactions.

      The Enterworks product suite currently consists of two components. The first component, Enterworks Content Integrator, delivers a real-time, personalized catalog of content from multiple sources, including databases, applications and HTML- and XML-based sources. Enterworks Content Integrator enables operators and users of e-marketplaces and portals to:

	•	integrate new content from customers, partners and suppliers quickly and easily;
	•	display a unified view of content in real time; and
	•	deliver integrated content to an e-business application.

      The second component of the Enterworks product suite, Enterworks Process Integrator, captures and automates a company’s business practices and expertise. Enterworks Process Integrator enables operators and users of e-marketplaces and portals to:

	•	integrate applications and processes;
	•	automate and track information flow to coordinate e-business interactions within and between companies; and
	•	resolve problems that require user interaction and guidance through complex processes.

      We deliver our products through our direct sales force and strategic partners, which include traditional system integrators, e-business professional services companies, and other software vendors and technology partners. Our current customers include financial, manufacturing, government, healthcare and telecommunications enterprises, as well as professional services providers. As of December 31, 1999, we had licensed our products to more than 50 companies, including The Boeing Company, CareFirst Blue Cross Blue Shield, Cast Alloys, Inc., Jefferies & Company, Inc., NonStopNet, Inc., Tivoli Systems, Inc. and the US Army.

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The Offering

      The number of shares of our common stock that will be outstanding after this offering is based on 49,323,975 shares outstanding as of December 31, 1999, assuming the conversion of all of our convertible preferred stock outstanding on that date into 21,739,127 shares of common stock. It excludes as of December 31, 1999:

	•	10,169,798 shares issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $0.73 per share; and 3,453,285 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.06 per share;
	•	2,570,902 shares of common stock reserved for issuance under our 1996 Stock Option Plan;
	•	5,000,000 shares of common stock reserved for issuance under our 2000 Stock Incentive Plan; and
	•	1,000,000 shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan.

Summary Financial Data

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      The above table sets forth a summary of our balance sheet 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 our convertible preferred stock into 21,739,127 shares of common stock; and
	•	on a pro forma, as adjusted, basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 21,739,127 shares of common stock and our receipt of the estimated net proceeds from the sale of                   shares of common stock in this offering at an assumed offering price of $     per share (after deducting estimated underwriting discounts and commissions and estimated offering expenses).

      Enterworks is a Delaware corporation. Our principal office is located at 19886 Ashburn Road, Ashburn, Virginia 20147. Our main telephone number is (703) 724-3800. The address of our Web site is www.enterworks.com. Information contained on our Web site is not a part of this prospectus.

      The “e.” logo, “Enterworks” and “Virtual DB” are our registered trademarks. “Enterworks Content Integrator” and “Enterworks Process Integrator” are also our trademarks. All other product, service and company names are trademarks or registered trademarks of other parties.

      Unless otherwise indicated, this prospectus assumes:

	•	the automatic conversion of our outstanding convertible preferred stock into common stock upon closing of this offering;
	•	the filing of our amended and restated certificate of incorporation, establishing a staggered board of directors and adopting certain anti-takeover provisions; and
	•	the underwriters’ over-allotment option will not be exercised.

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RISK FACTORS

      Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide whether to buy our common stock. If any of the following risks actually occur, our business, results of operations and financial condition could suffer significantly. In any such case, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

Risks Related to Our Business

We have a limited operating history, and as a result, you may have difficulty evaluating our business and operating results.

      We began operating as a corporation in 1996. An investor in our common stock must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets such as the market for e-business content and process integration, including:

	•	our dependence on our Enterworks Content Integrator and Enterworks Process Integrator software, from which we derive 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 our strategic partners;
	•	our ability to respond to competitive developments; and
	•	our dependence on our current executive officers and key employees.

      If we fail to successfully address these risks, our business could be harmed.

We have a history of losses and expect future losses. If we do not achieve or maintain profitability in the future, our viability will be in doubt, and our stock price may decline.

      We have incurred significant losses since our inception, including net losses of approximately $4.4 million in 1997, $8.7 million in 1998 and $14.0 million in 1999. We cannot assure you that our revenues will grow or that we will achieve or maintain profitability in the future. In addition, we intend to significantly increase our sales and marketing, product development and administrative expenses over the next twelve months. Accordingly, we will need to significantly increase revenues to achieve and maintain profitability. Our ability to increase revenues and achieve profitability will be affected by the other risks and uncertainties described in this section and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

      Our revenues and operating results are difficult to predict, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful or indicative of future performance. As a result, you should not rely upon them as an indication of future performance. Our future quarterly operating results may fluctuate and may not meet the expectations of securities analysts or investors. If this occurs, the price of our common stock

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	•	the size, timing and contractual terms of sales of our products and services due to the long and unpredictable sales cycle for our products;
	•	technical difficulties in our software that could delay the introduction of new products or increase their costs;
	•	introductions of new products or new versions of existing products by us or our competitors;
	•	changes in prices or the pricing models for our products and services or those of our competitors;
	•	our ability and the ability of our partners to implement e-business content and process integration solutions for our customers;
	•	changes in our mix of revenues; and
	•	changes in our mix of sales channels through which our products and services are sold.

      In addition, we experience seasonality which causes us to typically recognize a disproportionately greater amount of our revenues for any fiscal year in our third and fourth quarters, and a disproportionately lesser amount in our first and second quarters, due largely to the budgeting processes of our customers and the timing of their purchasing decisions. A substantial portion of our operating expenses, particularly personnel and facilities costs, is based, in part, on our expectations of future revenues and is relatively fixed in advance of any particular quarter. In addition, we typically enter into a significant portion of our new license contracts in the last two weeks of each quarter. We expect this trend to continue, and, therefore, failure or delay in the closing of orders would materially and adversely affect our quarterly operating results.

Variations in the time it takes us to sell our products may cause fluctuations in our operating results.

      Variations in the length of our sales cycles could cause our revenues to fluctuate widely from period to period. Because our operating expenses are relatively fixed over the short-term, these fluctuations could cause our operating results to suffer in some future periods. Our customers generally take a long time to evaluate our products, and many individuals may be involved in the evaluation process. Because of the number of factors influencing the sales process, the period between our initial contact with a new customer and the time when we recognize revenues from that customer varies widely in length. Our sales cycles typically range from three to six months, but for larger opportunities with new customers, these cycles can be longer.

We depend on sales of our Enterworks Content Integrator and Enterworks Process Integrator software, and our business will be materially and adversely affected if the market for these products does not continue to grow.

      Substantially all of our license revenues and services and support revenues have arisen from, or are related directly to, our Enterworks Content Integrator and Enterworks Process Integrator software. It is difficult to predict future revenues from either of these software products, especially because our Enterworks Process Integrator is in an early stage of commercialization. We expect to continue to be dependent upon these two software products in the future, and any factor adversely affecting either product or the market for e-business content and process integration software, in general, would materially and adversely affect our ability to generate revenues. In addition, we plan to combine and market these two

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We rely on our strategic partners to implement and promote our software products, and if these relationships fail, our business could be harmed.

      We have entered into relationships under our E-Alliance Program with a number of strategic partners, including traditional system integrators, e-business professional services companies, and other software vendors and technology partners. We have derived, and anticipate that we will continue to derive, a significant portion of our revenues from customers that purchase products or services from our partners. Our future growth will be limited if we fail to work effectively with our partners or fail to grow our base of these types of partners.

      Our partners generally are not restricted from working with, or promoting the products of, competing software companies. Accordingly, our success will depend on our partners’ willingness and ability to devote sufficient resources and efforts to marketing our software products rather than the products of others. If these relationships fail, we will have to devote substantially more resources to the marketing, distribution, sales, implementation and support of our products than we would otherwise. If our efforts are not successful, the loss of these partners could harm our business.

We are dependent on third-party software incorporated in our products, and impaired relations with these third parties, errors in third-party software or inability to enhance the software over time could harm our business.

      We incorporate third-party software into our products. We may incorporate additional third-party software into our products as we expand our product line and broaden the content and services accessible through our products. The operation of our products would be impaired if errors occur in the third-party software that we license. It may be more difficult for us to correct any errors in third-party software because the software is not within our control. Accordingly, our business could be adversely affected in the event of any errors in this software. Furthermore, it may be difficult for us to replace any third-party software if a vendor seeks to terminate our license to the software. In addition, some third-party software is licensed to us on a fixed-price basis, and our profit may be reduced if we discount our products that incorporate third-party, fixed-price software.

A substantial block of our voting stock is owned by Telos Corporation and is pledged to a bank. A default by Telos could result in the stock being repurchased by us or some of our stockholders or being sold to third parties who could influence decisions that could adversely affect our stock price.

      After the sale of the common stock offered by this prospectus, Telos Corporation, our former parent company, will beneficially own approximately      % of our outstanding voting securities. All our stock that Telos owns is pledged to Bank of America, N.A. to secure borrowings under a senior revolving credit facility. If Bank of America were to declare a default under the credit facility, it has agreed to offer the stock to us and some of our stockholders. If we or our stockholders fail to purchase the stock, the bank could sell the shares to a third party who could influence actions that could adversely affect our stock price. For additional information about Telos, see “Certain Transactions.”

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If we lose our key personnel, or fail to attract and retain additional personnel, the success and growth of our business may suffer.

      Our success depends significantly on the continued services of our officers, management and other key employees. None of these persons are bound by an employment agreement. The loss of services of any of these employees for any reason could harm our business. We believe that our success also will depend significantly on our ability to attract, integrate, motivate and retain additional highly skilled technical, managerial, sales, marketing and services personnel. Competition for skilled personnel is intense, and there can be no assurance that we will be successful in attracting, motivating and retaining the personnel required to grow and operate profitably. In addition, the cost of hiring and retaining skilled employees is high, and this reduces our profitability. Failure to attract and retain highly skilled personnel could materially and adversely affect our business.

We have a limited number of customers, and the loss of a major customer could adversely affect revenues.

      We have generated a substantial portion of our annual and quarterly revenues from a limited number of customers. In 1998, our two largest customers accounted for 27.3% and 11.4% of our total revenues. In 1999, two different customers accounted for 19.9% and 10.3% of total revenues. In the aggregate, our five largest customers represented approximately 65.7% and 55.0% of our revenues during those periods. We expect that a small number of customers will continue to represent a substantial portion of revenues in any given quarter in the foreseeable future. As a result, our inability to secure major customers during a given period or the loss of any one major customer could materially and adversely affect our business.

      In addition, we derive a substantial portion of our revenues from customers in specific industries:

	•	Sales to the government and public sector accounted for 70.4% of total revenues in 1998 and 42.6% of total revenues in 1999.
	•	Sales to the healthcare sector accounted for 10.1% of total revenues in 1998 and 15.6% of total revenues in 1999.

      If our customers in these industries decrease their information technology spending or we fail to penetrate other industries, our revenues may decline.

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

      The market for our products is intensely competitive, characterized by rapid technological change and is significantly affected by new product introductions. We face competition from in-house software developers who may develop some or all of the functionality that our products provide, as well as custom solutions built by system integrators and consultants. We also face competition from many vendors in the content and process integration areas such as OnDisplay, Inc., Hewlett-Packard Corporation and Vitria Technology, Inc., as well as from smaller private companies. We believe we may also face competition from IBM Corporation, Microsoft Corporation, Oracle Corporation and Sun Microsystems, Inc. if those companies enter into the e-business content or process integration markets. Furthermore, our competitors may combine with each other or enter into acquisitions or strategic relationships with other competitors, which would further increase the competition in the market. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater brand name

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We need to manage the planned growth of our organization and potential acquisitions effectively, or we may not succeed.

      We have experienced and are currently experiencing a period of significant growth. Our revenues have increased from $2.2 million in 1996 to $12.2 million in 1999. The number of our employees has increased from 56 at the end of 1996 to 170 at the end of 1999. Our ability to manage our growth will depend in large part on our ability to generally improve and expand our operational and sales and marketing capabilities, to develop the management skills of our managers and supervisors, many of whom have been employed by us for a relatively short period of time, and to train, motivate and manage both our existing employees and the additional employees that we may hire. Additionally, we may not anticipate adequately all of the demands that growth may impose on our systems, procedures and structure. Any failure to adequately anticipate and respond to these demands or manage our growth effectively could materially and adversely affect our future prospects.

      We may acquire businesses, products and technologies or enter into joint venture arrangements to complement or expand our business. Negotiating these transactions and integrating an acquired business, product or technology could divert our management’s time and resources. Future acquisitions may dilute your ownership interest, increase our debt and contingent liabilities, affect our amortization of goodwill and other intangibles, increase our research and development write-offs, and cause us to incur other acquisition-related expenses. Furthermore, acquired businesses may not be successfully integrated with our operations, and we may not receive the intended benefits of the acquisition.

      We expect to expand our international sales and marketing efforts. We have limited experience in international operations, and expanding our operations will subject us to risks including exposure to foreign economies, political instability, fluctuations in currency exchange rates, potentially adverse tax consequences and reduced protection for our intellectual property rights.

Our products must integrate with applications made by third parties, and if we lose access to the programming interfaces for these applications, or if we are unable to modify our products or develop new products in response to changes in these applications, our business could suffer.

      Our software uses components called “adapters” to communicate with our customers’ existing software applications. Our ability to develop these adapters is largely dependent on our ability to gain access to the application programming interfaces, or APIs, for the applications, and we may not have access to necessary APIs in the future. APIs are written and controlled by an application provider. Accordingly, if an application provider becomes a competitor by entering the market for e-business content and process integration, it could restrict our access to its APIs for competitive reasons. Our business could suffer if we are unable to gain access to these APIs. Furthermore, we may need to modify our software products or develop new adapters in the future as new applications or newer versions of existing applications are introduced. If we fail to continue to develop adapters or respond to new applications or newer versions of existing applications, our business could suffer.

Software defects could lead to loss of revenues or delay the market acceptance of our products.

      Our content and process integration software is complex and may contain undetected errors or failures when new products are first introduced or as new versions are released.

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We will continue to depend upon Telos for a portion of our administrative and support services.

      Telos will continue to provide us with a portion of the administrative and support services on a contract basis that we need to operate our business. These include some of our human resources, payroll and management information systems support services. Therefore, we will depend on Telos’ resources, systems and personnel for some of the administrative and support services that are used in the day-to-day operation of our business. We pay Telos a monthly management fee for these services. Telos has agreed to provide these services through at least June 30, 2000, and we have an option to renew these services through December 31, 2000. Over the next three to nine months, we plan to transition these services from Telos to our own systems or to the systems of other third-party service providers. We may not be able to accomplish this task within the period provided for in the renewals and may not be able to negotiate further renewals with Telos. If we cannot, our ability to operate our business may be adversely affected. Also, we may have to pay more to obtain or maintain these systems than we currently pay to Telos. If so, our profitability may be reduced.

Two members of our board of directors may have conflicts of interest because of their relationship with Telos.

      Mr. Wood, our Chairman and our Chief Executive Officer, also serves as a director, Chief Executive Officer and President of Telos. Mr. Aldrich, another of our directors, is the Chief Operating Officer of Telos. Messrs. Wood and Aldrich will have obligations to us and to Telos. This may result in conflicts of interest regarding a variety of matters that can affect our business, such as business arrangements between the two companies, as well as acquisitions, financings, hiring of personnel and other corporate opportunities that may be suitable for both companies.

We may be subject to future product liability claims, and our company’s and products’ reputations may suffer.

      Many of our installations involve projects that are critical to the operations of our customers’ businesses and provide benefits that may be difficult to quantify. Any failure in a customer’s system could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although our license agreements with our customers typically contain provisions designed to limit contractually our liability for damages arising from negligent acts, errors, mistakes or omissions, it is possible that these provisions will not be enforceable in some instances or would otherwise not protect us from liability for damages. Although we maintain general liability insurance coverage, this coverage may not continue to be available on reasonable terms, or at all, or may be insufficient to cover one or more large claims.

      We have entered into and plan to continue to enter into agreements with strategic partners whereby we license our software products for integration with our partners’ software. If a partner’s software fails to meet its customers’ expectations or causes failures in its customers’ systems, the reputation of our company and products could be materially and

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We need to expand our sales and customer support channels, and if we fail to do so, our growth could be limited.

      We need to expand significantly our sales and customer service and support operations in order to generate increased revenues. New sales personnel will require training and may take a long time to achieve full productivity. There is strong competition for personnel, and we may not be able to attract and retain sufficient new sales personnel to expand our business. In addition, we believe that, as the number of our installations increases, we will require a number of highly trained customer service and support personnel. We may not be able to increase the size of our customer service and support organization to provide the high level of support required by our customers.

If we fail to develop new products and services in the face of our industry’s rapidly evolving technology, our future results may be materially and adversely affected.

      The market for e-business content and process integration software is subject to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. Our growth and future operating results will depend, in part, upon our ability to enhance existing applications and develop and introduce new applications or components that:

	•	meet or exceed technological advances in the marketplace;
	•	meet changing customer requirements;
	•	comply with changing industry standards;
	•	achieve market acceptance;
	•	integrate successfully with third-party software; and
	•	respond to competitive products.

      Our product development and testing efforts have required, and are expected to continue to require, substantial investment. We may not possess sufficient resources to continue to make the necessary investments in technology. In addition, we may not successfully identify new software opportunities or develop and bring new software to market in a timely and efficient manner. If we are unable, for technological or other reasons, to develop and introduce new and enhanced software in a timely manner, we may lose existing customers and fail to attract new customers, resulting in a decline in revenues.

Some industries have adopted industry-specific technologies, and we may need to expend significant resources to enhance our products for specific industries.

      We believe our content and process integration software is broadly applicable to many industries; however, in order to succeed in some industries, we will need to accommodate existing proprietary technologies that are specific to these industries. For example, many companies in the healthcare and financial services industries have adopted industry-specific protocols for the exchange of information. To sell our products successfully to companies in these industries, we may need to expend resources to enhance our products to adapt to these industry-specific technologies, which could be costly and require the diversion of engineering resources.

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The limited ability of legal protections to safeguard our intellectual property rights could impair our ability to compete effectively.

      Our success and ability to compete are substantially dependent on our internally developed technologies and trademarks, which we protect through a combination of confidentiality procedures, contractual provisions, patent, copyright, trademark and trade secret laws. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and, although we are unable to determine the extent to which piracy of our software products exists, we expect software piracy to be a problem. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Furthermore, our competitors may independently develop technology similar to ours.

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

      The number of intellectual property claims in our industry may increase as the number of competing products grows and the functionality of products in different industry segments overlaps. Although we are not aware that any of our products infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not claim infringement by us with respect to current or future products. Any of these claims, with or without merit, could be time-consuming to address, result in costly litigation, cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements might not be available on terms acceptable to us or at all, which could materially and adversely affect our business.

Risks Related to Our Industry

The market for e-business content and process integration software is in an early stage of development, and our software products may not achieve market acceptance.

      The market for content and process integration software is relatively new and rapidly evolving. We do not know if our target markets will widely adopt and deploy e-business integration products such as ours. In addition, our products are complex and generally involve significant capital expenditures by our customers. We do not have a long history of selling our products and will have to devote substantial resources to inform prospective customers about the benefits of our products. Our efforts to inform potential customers may not result in our products achieving market acceptance. In addition, many of these prospective customers have made significant investments in internally-developed or other custom systems and may incur significant costs in switching to third-party products such as ours. If the market for our products fails to grow or grows more slowly than we anticipate, our business would suffer.

Lack of growth or decline in Internet usage or e-business could be detrimental to our future operating results.

      Our products enhance the ability of our customers to transact business and conduct operations over the Internet. Therefore, our future sales and profits are substantially dependent upon the Internet as a viable commercial marketplace. The Internet may not succeed in becoming a viable marketplace for a number of reasons, including:

	•	potentially inadequate development of network infrastructure or delayed development of enabling technologies and performance improvements;

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	•	delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity;
	•	security risks and concerns;
	•	increased taxation and governmental regulation; or
	•	changes in, or insufficient availability of, communications services to support the Internet, resulting in slower Internet user response times.

      The occurrence of any of these factors could require us to modify our technology. Any such modification could involve the expenditure of significant amounts of resources by us. In the event that the Internet does not become a viable commercial marketplace, our business, financial condition and results of operations could be materially and adversely affected.

Security risks and concerns may deter the use of the Internet for conducting e-business.

      Concerns about the security of confidential information act as a barrier to acceptance of e-business and Internet communications. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the Internet for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses and software programs that disable or impair computers have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt our software solutions or make them inaccessible to customers or suppliers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our customers use our products in connection with the storage and transmission of proprietary information, such as credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business could be harmed if we do not prevent them.

New laws or regulations affecting the Internet, e-business or commerce in general could reduce our revenues and adversely affect our growth.

      Congress and other domestic and foreign governmental authorities have adopted and are considering legislation affecting the use of the Internet, including laws relating to the use of the Internet for commerce and distribution. The adoption or interpretation of laws regulating the Internet, or of existing laws governing such things as consumer protection, libel, property rights and personal privacy, could hamper the growth of the Internet and its use as a communications and commercial medium. If this occurs, companies may decide not to use our products or services, and our business and operating results could suffer.

Potential Year 2000 problems with our internal systems or the software that we sell could cause delay or loss of revenue, diversion of resources or increased costs.

      Many companies’ computer systems, software products and control devices needed to be upgraded or replaced in order to operate properly in the Year 2000 and beyond because of an inability to distinguish 21st century dates from 20th century dates.

      Our software did not experience any date-related problems on January 1, 2000. However, our software may contain undetected errors or defects associated with Year 2000 date functions that have not yet surfaced. If any such errors or defects do exist, we may incur

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      If these systems do experience date-related problems, we could experience delay or loss of revenues, diversion of resources or increased costs, and our financial condition could be harmed.

Risks Related to This Offering

Our executive officers and directors and their affiliates, including Telos, will own a large percentage of our voting stock and will have a substantial ability to influence decisions that could adversely affect our stock price.

      Following the completion of this offering, our executive officers, directors and their affiliates will own approximately      % of the outstanding shares of common stock. As a result, these stockholders will be able to influence substantially all matters requiring stockholder approval, including our management and affairs. Matters that require stockholder approval include:

	•	election of directors;
	•	mergers or consolidations; and
	•	sales of all or substantially all of our assets.

      This concentration of ownership may delay, deter or prevent acts that would result in a change of our control, which could reduce the market price of our common stock.

Our need for additional financing is uncertain, as is our ability to raise further financing if required.

      We currently anticipate that our available cash resources, combined with the net proceeds from this offering, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least twelve months after the date of this prospectus. We may need to raise additional funds, however, to respond to business contingencies, which may include the need to:

	•	fund more rapid expansion;
	•	fund additional marketing expenditures;
	•	develop new or enhance existing products and services;
	•	enhance our operating infrastructure;
	•	hire additional personnel;
	•	respond to competitive pressures; or
	•	acquire complementary businesses or necessary technologies.

      If we raise additional funds through the issuance of equity or convertible debt securities, our stockholders’ percentage ownership will be reduced, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of

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Investors in this offering will incur immediate and substantial dilution in the book value of their shares.

      The offering price will be substantially higher than the book value of our common stock. At the assumed offering price of $     per share, the book value of the common stock after the offering will be $     per share. This represents an immediate and substantial dilution per share of the common stock. The dilution per share represents the difference between the amount per share paid by the purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. In addition, to the extent outstanding options or warrants are exercised, there will be further dilution to new investors.

Our stock price after this offering may be volatile.

      Prior to this offering, our common stock has not been sold in a public market. You will pay a price that we negotiated with the representatives of the underwriters based on a number of factors, which may be different from a price established in a competitive market. After this offering, an active trading market in our stock might not develop. If an active trading market does develop, it may not continue. Also, if an active trading market does develop, the trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many technology companies and e-commerce companies, which have often been unrelated to the operating performance of these companies. Our stock price could fluctuate as a result of these market fluctuations.

Our charter and bylaws and Delaware law contain provisions that could discourage a takeover even if beneficial to stockholders.

      Our charter and our bylaws, in conjunction with Delaware law, contain provisions that could make it more difficult for a third party to obtain control of us even if doing so would be beneficial to stockholders. For example, our charter provides for a classified board of directors and allows the board of directors to expand its size and fill any vacancies without stockholder approval. In addition, upon closing of this offering, our charter will restrict the ability of stockholders to take written actions without holding a meeting and require a two-thirds vote of stockholders to remove a director from office. Furthermore, our board has the authority to issue preferred stock and to designate the voting rights, dividend rate and privileges of the preferred stock all of which may be greater than your rights as a common stockholder.

We will retain broad discretion in using the net proceeds from this offering and may spend a substantial portion in ways with which you do not agree.

      We will retain a significant amount of discretion over the application of the net proceeds from this offering, as well as over the timing of our expenditures. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, we may apply the net proceeds from this offering in ways with which you disagree.

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

      The market price of our common stock could decline as a result of sales by our existing stockholders or the perception that these sales may occur. These sales also could make it more difficult for us to raise funds through equity offerings in the future at a time and at a

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      The holders of a significant amount of our common stock, as well as the holders of outstanding warrants are entitled to registration rights with respect to their common stock or the common stock underlying their convertible securities. If these holders, by exercising their registration rights, cause a large number of securities to be registered and sold in the public market, these sales could have an adverse effect on the market price for our common stock. If we were to include, in a registration statement initiated by us, shares held by these holders pursuant to the exercise of their registration rights, these sales may have an adverse effect on our ability to raise needed capital.

      Upon completion of this offering,                shares of our common stock will be outstanding and will be tradable as follows:

	•	of these shares will be “restricted securities.” Following the expiration of the lock-up period related to this offering, holders of restricted securities may generally sell their shares in the public market without registration in accordance with the holding period, volume and other restrictions of Rule  144 or under any other applicable exemption under the Securities Act. We describe Rule 144 in the “Shares Available for Future Sale–Rule 144” section of this prospectus.
	•	Except for any shares purchased by our affiliates, the                shares of our common stock sold in this offering will be freely tradable without further restrictions or registration under the Securities Act.
	•	Shares of our common stock reserved for issuance under our stock option plans will be freely tradable after option exercise after we register these shares under the Securities Act. We expect to register them after this offering. We describe these plans in the paragraph “Employee Benefit Plans” in the “Management” section of this prospectus.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

      We make many statements in this prospectus under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere that are forward-looking and are not based on historical facts. These statements relate to our future plans, objectives, expectations and intentions. We may identify these statements by the use of words such as “believe,” “expect,” “will,” “anticipate,” “intend” and “plan” and similar expressions. These forward-looking statements involve a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we discuss in “Risk Factors” and elsewhere in this prospectus. These forward-looking statements speak only as of the date of this prospectus, and we caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this prospectus.

      This prospectus contains estimates of market growth related to the Internet and e-business. These estimates have been included in studies published by market research firms. These estimates have been produced by industry analysts based on trends to date, their knowledge of technologies and markets and customer research, but these are forecasts only and are subject to inherent uncertainty.

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USE OF PROCEEDS

      The net proceeds from the sale of                shares of common stock offered by us will be approximately $     million, or approximately $          million if the underwriters’ over-allotment option is exercised in full. This estimate is based on an assumed offering price of $     per share, after deducting estimated underwriting discounts and commissions and the estimated offering expenses.

      The principal purposes of this offering are to increase our working capital, create a public market for our common stock, facilitate our future access to the public capital markets and increase our visibility in our markets. We intend to use the net proceeds of this offering primarily for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire additional businesses, products and technologies or to establish joint ventures that we believe will complement our current or future business. However, we have no specific plans, agreements or commitments to do so and are not currently engaged in any negotiations for any acquisitions or joint ventures. The amounts that we actually expend for working capital purposes will vary significantly depending on a number of factors, including future revenue growth, if any, and the amount of cash we generate from operations. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering. Until we use the net proceeds of this offering, we will invest them in short-term investment-grade, interest-bearing instruments.

DIVIDEND POLICY

      We have never declared or paid cash dividends on our common or preferred stock. We do not intend to pay cash dividends on our common or preferred stock for the foreseeable future. This is because we need to retain our cash for working capital and to finance our planned growth. However, our board of directors is free to change our dividend policy in the future, based upon factors such as our results of operations, financial condition, cash flow, cash needs and future prospects.

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CAPITALIZATION

      The following table shows 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 our convertible preferred stock into 21,739,127 shares of common stock; and
	•	on a pro forma, as adjusted, basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 21,739,127 shares of common stock and our receipt of the estimated net proceeds from the sale of                shares of common stock in this offering at an assumed offering price of $     per share (after deducting estimated underwriting discounts and commissions and estimated offering expenses).

      You should read this table together with our financial statements and their related notes, which we have included elsewhere in this prospectus.

      This table does not include the following as of December 31, 1999:

	•	10,169,798 shares issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $0.73 per share;
	•	3,453,285 shares issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $1.06 per share;
	•	2,570,902 shares of common stock reserved for issuance under our 1996 Stock Option Plan;
	•	5,000,000 shares of common stock reserved for issuance under our 2000 Stock Incentive Plan; and
	•	1,000,000 shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan.

Please read the capitalization table together with the sections of this prospectus entitled “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Management — Employee Benefit Plans” and with the financial statements and their related notes included elsewhere in this prospectus.

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DILUTION

      Our pro forma net tangible book value as of December 31, 1999 was approximately $19.2 million, or $0.39 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the number of shares of common stock outstanding as of December 31, 1999, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 21,739,127 shares of common stock.

      After giving effect to the sale of common stock offered hereby, (based upon an assumed offering price of $     per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses), our pro forma net tangible book value as of December 31, 1999, would have been approximately $     million, or $     per share of common stock. This represents an immediate increase in pro forma net tangible book value of $          per share to existing stockholders and an immediate dilution of $     per share to new investors. The following table illustrates this per share dilution:

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

      The above discussion and tables are based upon the number of shares actually issued and outstanding as of December 31, 1999 and assume no exercise of stock options or warrants outstanding as of December 31, 1999. As of that date, there were:

	•	10,169,798 shares issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $0.73 per share;
	•	3,453,285 shares issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $1.06 per share; and
	•	2,570,902 shares of common stock reserved for issuance under our 1996 Stock Option Plan.

      To the extent these stock options and warrants are exercised, there will be further dilution to new investors.

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SELECTED FINANCIAL DATA

      You should read our selected financial data together with our financial statements and their related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included elsewhere in this prospectus. The statement of operations data for each of the three years in the period ended December 31, 1999 and the balance sheet data as of December 31, 1998 and 1999 have been derived from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 have been derived from our audited financial statements not included in this prospectus. The historical results presented below are not necessarily indicative of future results.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

      The following is a discussion of our financial condition and results of operations for each of the past three years. You should read this discussion together with our financial statements and their related notes, which we have included elsewhere in this prospectus. We make some forward-looking statements about our future performance. These forward-looking statements include numerous risks and uncertainties, as described in the “Risk Factors” section of this prospectus. Our actual results could differ materially from those discussed in these forward-looking statements.

Overview

      We began operating in 1996 as a controlled subsidiary of Telos. Prior to 1996, we were a division of Telos. We licensed our first data integration product in January 1995 and our first process integration product in March 1999. We licensed our first network firewall product in February 1996, and we ceased offering it in December 1997 in order to concentrate on our other products. We originally marketed our products primarily to government agencies and contractors. However, in 1999, we expanded our marketing efforts to focus on commercial accounts and sales through indirect channels. Our fiscal year end is December 31. References to the years 1997, 1998 or 1999 mean the fiscal year ended December 31 unless otherwise indicated.

      We generate revenues principally from licensing our software products and from providing related consulting, training and support services. Historically, we have recorded a significant portion of our revenues from a small number of large customers, and we expect this trend to continue for the foreseeable future. In 1998, our two largest customers accounted for 27.3% and 11.4% of our total revenues. In 1999, two different customers accounted for 19.9% and 10.3% of total revenues. In the aggregate, our five largest customers represented approximately 65.7% and 55.0% of our revenues during those periods.

      Customers typically pay an up-front, one-time fee for a perpetual license of our software or pay over a period of time based on the number of interactions. We price our products based on either the number of users accessing our software or the number of interactions per year with each product. Our license agreements generally provide for full payment within 30 days of product delivery, although in some cases we will negotiate longer payment terms.

      License revenues are recognized when an agreement is signed, delivery of the product has occurred, no significant obligations remain, the fee is fixed or determinable and collection of the resulting receivable is probable and, if required by the contract terms, acceptance criteria are met. The sales cycle for our products is typically three to six months from initial contact to delivery and revenue recognition. Delivery lead times for our products are very short, and consequently, substantially all of our license revenues in each quarter may result from orders received in that quarter. Furthermore, we have experienced significant seasonality and variability in the size and number of orders. We expect the variability in the size and number of orders to continue for the foreseeable future. However, we expect seasonality to decline as our commercial and indirect revenues increase and as revenues under our recently-introduced interaction-based pricing model increase.

      Services and support revenues are principally derived from consulting services associated with the implementation and integration of our software products, training of customers’ employees, and ongoing customer and partner support. We typically deliver consulting services on a time and materials basis and are generally reimbursed for out-of-pocket expenses incurred by our personnel. Implementation and training services are generally completed within three to six months of the initial license sale.

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      Services revenues are recognized as the services are performed. Support revenues, which are invoiced in advance of performance, are recognized ratably over the term of the support agreement, which is generally twelve months. Most support agreements are renewable at the discretion of the customer. Pursuant to these agreements, we provide product enhancements and technical support services to customers for an annual fee, which is generally 18% of the license fee.

      Cost of license revenues includes costs associated with royalties for third-party embedded software, distribution of software and related costs, as well as the amortization of capitalized software development costs. The cost of license revenues as a percentage of license revenues for Enterworks Process Integrator is less than for Enterworks Content Integrator, and as such, we expect that the gross margin related to license revenues will improve, as the percentage of sales from Enterworks Process Integrator increases. In addition, we expect that our gross margin related to license revenues will improve as amortization of capitalized software development costs decreases and as royalties for third-party embedded software decrease.

      Cost of services and support revenues primarily includes salaries and related expenses for our service organization, costs of third parties contracted to provide services and related indirect costs, and, to a lesser extent, amortization of capitalized software development costs associated with support. We expect that the cost of services and support revenues will increase, in absolute dollars, in parallel with increased services and support revenues. We expect that the cost of services and support revenues will decrease, as a percentage of total revenues, as we increase our future support renewals and engage in specialized services activities with higher average bill rates.

      Sales and marketing expenses include personnel-related costs, as well as advertising and promotional costs. We expect these costs will increase, in absolute dollars and as a percentage of revenues, as we increase our sales and marketing efforts.

      Research and development expenses primarily include personnel-related costs associated with the development of our software products. We expense software development costs as incurred until technological feasibility of the software is established, after which we capitalize any additional costs until general release of the related software product. We amortize capitalized software development costs over the estimated product life, which is generally three years or less. We periodically evaluate the net realizable value of capitalized software development costs based on the estimated future gross revenues from a product, net of estimated costs of completing and disposing of the product. When net amounts capitalized exceed net realizable value, we expense the excess amount. We expect that research and development costs will increase, in absolute dollars, as we continue to add personnel necessary to enhance current products and develop future products. However, we expect that these costs will decrease, as a percentage of revenues, as revenues increase.

      General and administrative expenses consist primarily of compensation and related expenses for our executive, finance and administrative personnel. We expect that general and administrative expenses will continue to increase, in absolute dollars, as we expand our operations and decrease, as a percentage of revenues, as revenues increase.

      Interest expense primarily includes interest related to our payable to Telos, as well as interest on our subordinated debt. We expect that interest expense will decrease, in absolute dollars, and as a percentage of revenues because the interest-bearing portion of our payable to Telos has been forgiven and because our subordinated debt has been repaid or converted into shares of our common stock.

      Through December 30, 1999, we reported no separate tax liability due to our relationship as a consolidated subsidiary of Telos. The income tax benefits reflected in the accompanying

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Results of Operations

      The following table sets forth the statement of operations data as a percentage of our total revenues for the periods presented. The data has been derived from, and should be read in conjunction with, our audited financial statements and their related notes included in this prospectus.

1999 Compared to 1998

  Revenues

      License Revenues. Revenues from licenses of our products increased 114.2% to $7.5 million in 1999 from $3.5 million in 1998. The increase was primarily due to an overall increase, as compared to 1998, in sales of Enterworks Content Integrator and also due to sales of Enterworks Process Integrator, which we first sold in 1999. As a percentage of total revenues, software license revenues represented 61.2% in 1999 and 49.2% in 1998.

      Services and Support Revenues. Revenues from services and support increased 31.3% to $4.7 million in 1999 from $3.6 million in 1998. This growth resulted primarily from services generated by new contracts, the extension of existing contracts, and to a lesser extent, from new and renewal support arrangements. As a percentage of total revenues, services and support revenues represented 38.8% in 1999 and 50.8% in 1998. This decrease reflects the increased performance of services and support activities by our partners.

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  Cost of Revenues

      Cost of License Revenues. Cost of license revenues increased 10.1% to $2.9 million in 1999 from $2.6 million in 1998. The increase in cost of license revenues primarily reflects the increase in third-party sub-license fees associated with the increase in new licenses, partially offset by a decrease of $182,000 in the amortization of software development costs. As a percentage of license revenues, these costs decreased to 38.5% in 1999 from 74.9% in 1998. Excluding the effects of amortization of software development costs, the cost of license revenues as a percentage of license revenues decreased to 19.8% in 1999 from 29.6% in 1998 which reflected more favorable third-party sub-license terms and the change in product mix in 1999. Gross profit from license revenues increased to 61.5% in 1999 from 25.1% in 1998.

      Cost of Services and Support Revenues. Cost of services and support revenues increased 59.8% to $4.7 million in 1999 from $2.9 million in 1998. The increase in cost of services and support revenues primarily reflects an increase in personnel costs. As a percentage of services and support revenues, these costs increased to 99.0% in 1999 from 81.4% in 1998. This increase was primarily due to increased personnel costs during 1999 required to support anticipated increased revenues, as well as to train staff to respond to expected order increases. Gross profit from services and support revenues decreased to 1.0% in 1999 from 18.6% in 1998.

  Operating Expenses

      Sales and Marketing Expenses. Sales and marketing expenses increased 114.3% to $10.5 million in 1999 from $4.9 million in 1998. The increase was primarily due to increased compensation costs related to increased direct and indirect sales representatives, increased product marketing staff and, to a lesser extent, increased commissions to sales representatives. There were also increases in promotional activities and advertising campaigns related to targeted marketing efforts. As a percentage of total revenues, these costs increased to 86.3% in 1999 from 69.3% in 1998.

      Research and Development Expenses. Research and development expenses increased 63.8% to $7.2 million in 1999 from $4.4 million in 1998. This increase reflects increases in staffing throughout 1999 associated with the research, development and introduction of Enterworks Process Integrator and in support of new releases of Enterworks Content Integrator. Total expenditures for research and development, which include capitalized software development costs, were $8.0 million in 1999, a 24.3% increase over 1998. This increase was due to the personnel growth noted above. As a percentage of total revenues, total expenditures decreased to 65.7% in 1999 from 91.0% in 1998, principally due to the increases in total revenues.

      General and Administrative Expenses. General and administrative expenses increased 91.1% to $3.9 million in 1999 from $2.0 million in 1998. The growth in general and administrative expenses was primarily a result of expansion in staffing to support our revenue growth. During 1999, we began to assume more general and administrative activities as we continued our separation from Telos. As a percentage of total revenues, these costs increased to 31.9% in 1999 from 28.7% in 1998, principally because of a transition period during which we paid Telos for activities which we were also beginning to perform ourselves.

      Write-off of Software Development Costs. The net realizable value of capitalized software development costs is periodically evaluated based on the estimated future gross revenues from a product, net of the estimated costs of completing and disposing of the product. When net amounts capitalized exceed net realizable value, the excess amount is expensed. During 1999, no write-offs were necessary and during 1998, we wrote off $1.7 million in connection with net realizable value adjustments. The 1998 adjustment related to the core architecture of a product which was redesigned.

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  Interest Expense

      Interest expense increased 66.9% to $3.6 million in 1999 from $2.1 million in 1998. The increase was primarily associated with increased borrowings from Telos, as well as an increase in accretion related to the repayment and conversion of subordinated notes payable.

  Income Tax Benefit

      The income tax benefit increased 31.8% to $6.5 million in 1999 from $4.9 million in 1998. The increase was primarily due to higher compensation from Telos for Telos’ utilization of net operating losses generated by us in accordance with the tax allocation agreement between the two companies, which was terminated effective December 30, 1999. Utilization of any remaining net operating losses or future net operating losses generated by us will benefit Enterworks, as and if utilized, independent of Telos.

1998 Compared to 1997

  Revenues

      License Revenues. Revenues from licenses of our products increased 140.7% to $3.5 million in 1998 from $1.4 million in 1997. The increase was primarily due to an overall increase in Enterworks Content Integrator license fees. As a percentage of total revenues, software license revenues represented 49.2% in 1998 and 42.5% in 1997.

      Services and Support Revenues. Revenues from services and support increased 83.7% to $3.6 million in 1998 from $2.0 million in 1997. This growth resulted primarily from services generated by new contracts, the extension of existing contracts, and to a lesser extent, from new and renewal support arrangements. As a percentage of total revenues, services and support revenues represented 50.8% in 1998 and 57.5% in 1997.

  Cost of Revenues

      Cost of License Revenues. Cost of license revenues increased 79.7% to $2.6 million in 1998 from $1.5 million in 1997. The increase in cost of license revenues primarily reflects the increase in amortization of software development costs and the increase of third-party sub-license fees associated with the increase in new licenses. As a percentage of license revenues, these costs decreased to 74.9% in 1998 from 100.3% in 1997. Excluding the effects of amortization of software development costs, the cost of license revenues as a percentage of license revenues decreased to 29.6% in 1998 from 55.9% in 1997, reflecting increased revenues and more favorable third-party sub-license terms. Gross profit from license revenues increased to 25.1% in 1998 from a gross deficit of 0.3% in 1997.

      Cost of Services and Support Revenues. Cost of services and support revenues increased 40.3% to $2.9 million in 1998 from $2.1 million in 1997. The increase in cost of services and support revenues primarily reflects the increase in personnel costs related to the additional services and support revenues. As a percentage of services and support revenues, these costs decreased to 81.4% in 1998 from 106.5% in 1997, reflecting more efficient implementations of our products. Gross profit from services and support revenues increased to 18.6% in 1998 from a gross deficit of 6.5% in 1997.

  Operating Expenses

      Sales and Marketing Expenses. Sales and marketing expenses increased 31.5% to $4.9 million in 1998 from $3.7 million in 1997. The increase was primarily due to increased commissions to sales representatives as a result of increased license revenues and, to a lesser extent, increased promotional activities relating to the announcement of new product

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      Research and Development Expenses. Research and development expenses increased 532.0% to $4.4 million in 1998 from $696,000 in 1997. This increase reflects increases in staffing throughout 1998 associated with the research and development efforts related to Enterworks Process Integrator and in support of new releases of Enterworks Content Integrator. Total expenditures for research and development, which include capitalized software development costs, were $6.4 million in 1998, a 70.4% increase over 1997. This increase was due to the personnel growth noted above. As a percentage of total revenues, these total expenditures expenses decreased to 91.0% in 1998 from 111.1% in 1997.

      General and Administrative Expenses. General and administrative expenses increased 126.3% to $2.0 million in 1998 from $898,000 in 1997. The growth in general and administrative expenses was primarily a result of expansion in staffing to support our revenue growth. As a percentage of total revenues, general and administrative expenses increased to 28.7% in 1998 from 26.4% in 1997.

      Write-off of Software Development Costs. During 1998 and 1997, we wrote off $1.7 million and $449,000, respectively, in connection with net realizable value adjustments. The 1997 adjustment related to the abandonment of our firewall product.

  Interest Expense

      Interest expense increased 47.8% to $2.1 million in 1998 from $1.4 million in 1997. The increase was primarily associated with increased borrowings from Telos. As a percentage of total revenues, interest expense decreased to 30.3% in 1998 from 42.6% in 1997, primarily due to increases in revenues.

  Income Tax Benefit

      The income tax benefit increased 70.1% to $4.9 million in 1998 from $2.9 million in 1997. The increase was primarily due to higher compensation from Telos for Telos’ utilization of net operating losses generated by us, in accordance with the tax allocation agreement between the two companies, which was terminated effective December 30, 1999.

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Quarterly Results of Operations

      The following table sets forth unaudited quarterly financial data for the eight quarters ended December 31, 1999, and includes such data as a percentage of our total revenues for the periods presented. The unaudited quarterly financial data has been prepared on a basis consistent with the audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly this information, which should be read in conjunction with our financial statements and their related notes included in this prospectus.

      Our quarterly operating results have varied in the past and may vary significantly in the future depending on many factors including, among others: the size, timing and recognition of revenue from significant orders; the timing of new product releases and product enhance-

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      On an annual basis, we have generally realized lower revenues in our first and second quarters than in our third and fourth quarters. We believe that these fluctuations are caused primarily by customer budgeting and purchasing patterns, particularly in the case of our government customers.

      A substantial portion of our operating expense level, particularly personnel and facilities costs, are based, in part, on our expectations as to future revenues and are relatively fixed in advance of any particular quarter. In addition, we typically enter into a significant portion of our new license contracts in the last two weeks of a quarter. Consequently, if revenues are below expectations, our quarterly operating results and financial condition could be adversely affected. As a result of the foregoing factors, we believe that our quarterly revenues, expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of our operating results may not be meaningful and that, in any event, such comparisons should not be relied upon as indicators of future performance.

Liquidity and Capital Resources

      From our inception through December 30, 1999, we financed our operations and met our capital expenditure requirements primarily through funds borrowed from Telos. On December 30, 1999, we completed the sale of our Series A convertible preferred stock, which totaled $23.0 million in net proceeds, as well as several concurrent transactions which are described in Note 7 to the financial statements. As a result of these transactions, Telos’ ownership percentage in us decreased from 99.7% to 34.8%. Accordingly, we were deconsolidated from Telos and ceased to be funded by Telos after December 30, 1999.

      Our operating activities have used cash in each of the last three fiscal years. During 1997, 1998 and 1999, cash used in operating activities of $2.6 million, $6.1 million and $8.4 million, respectively, resulted principally from net losses of $4.4 million, $8.7 million and $14.0 million, respectively.

      Cash used in investing activities was $3.6 million, $2.6 million and $1.6 million in 1997, 1998 and 1999, respectively. The cash used in investing activities was principally used for our investment in our software products, and for the purchase of computers and other office equipment and fixtures.

      Cash provided by financing activities was $6.1 million, $8.8 million and $28.7 million in 1997, 1998 and 1999, respectively. The cash provided by financing activities was principally provided by the borrowings from Telos in 1997 and 1998, and by the net proceeds of the offering of Series A convertible preferred stock and borrowings from Telos in 1999.

      We anticipate that our liquidity needs for at least the next twelve months will be met by our existing capital resources and the net proceeds from this offering. After this time, we cannot assure you that cash generated from operations will be sufficient to satisfy our liquidity requirements, and we may need to raise additional capital by selling additional equity or debt securities or by obtaining a credit facility.

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Year 2000 Issues

      To date we have experienced no significant adverse effects related to the Year 2000 computer issue. We had no notable problems with equipment or our internal information technology systems which may have been affected by faulty embedded chips or other Year 2000 problems. We are not aware of Year 2000 problems with our software. In addition, we have not been made aware of, nor have we experienced, Year 2000 problems with any third-party software. We have not incurred any material costs directly associated with Year 2000 compliance efforts, except for compensation costs for certain employees who have dedicated time to our assessment of Year 2000 compliance and associated remedies. We do not expect to incur additional material costs associated with Year 2000 compliance; however, in the event that we have not identified and corrected any significant Year 2000 compliance issues, these unresolved issues could harm our business.

Quantitative and Qualitative Disclosures About Market Risk

      Market Risk. We develop products in the United States and market our products in North America and, to a lesser extent, the rest of the world. As a result, our financial results could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. Because all of our revenues are currently denominated in US dollars, a strengthening of the dollar could make our products less competitive in foreign markets.

      Interest Rate Risk. We have an investment portfolio of money market funds and fixed income certificates of deposit. The fixed income certificates of deposit, like all fixed income securities, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in short-term securities. In view of the nature and mix of our total portfolio, a 10% movement in market interest rates would not have a significant impact on the total value of our portfolio as of December 31, 1999.

New Accounting Pronouncements

      In 1999, we adopted Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 was effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not have a material impact on our results of operations.

      In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended by SFAS 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133,” is effective for all quarters of the year ending December 31, 2001. We currently do not engage or plan to engage in the use of derivative instruments, and do not expect SFAS 133 to have a material impact on our results of operations.

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BUSINESS

Overview

      We develop, market and support a software framework that integrates content and processes for companies seeking to participate in e-business. We target operators and users of e-marketplaces and portals. E-marketplaces and portals are Web-based destinations where employees, customers, partners and suppliers can interact to obtain information about products and services, and conduct business more efficiently. Our products enable customers to build or join e-marketplaces and portals rapidly, add new content and e-business participants easily, and automate the end-to-end processes required for e-business interaction. In addition, our products complement and leverage companies’ significant investments in technology infrastructure, such as packaged or custom-built applications, information databases and integration systems.

      The Enterworks product suite currently consists of two components. The first component, Enterworks Content Integrator, delivers a real-time, personalized catalog of content from multiple sources, including databases, applications and HTML- and XML-based sources. Enterworks Content Integrator enables operators and users of e-marketplaces and portals to:

	•	integrate new content from customers, partners and suppliers quickly and easily;
	•	display a unified view of content in real time; and
	•	deliver integrated content to an e-business application.

      The second component of the Enterworks product suite, Enterworks Process Integrator, captures and automates a company’s business practices and expertise. Enterworks Process Integrator enables operators and users of e-marketplaces and portals to:

	•	integrate applications and processes;
	•	automate and track information flow to coordinate e-business interactions within and between companies; and
	•	resolve problems that require user interaction and guidance through complex processes.

      We deliver our products through our direct sales force and strategic partners, which include traditional system integrators, e-business professional services companies, and other software vendors and technology partners. Our current customers include financial, manufacturing, government, healthcare and telecommunications enterprises, as well as professional services providers. As of December 31, 1999, we had licensed our products to more than 50 companies, including The Boeing Company, CareFirst Blue Cross Blue Shield, Cast Alloys, Inc., Jefferies & Company, Inc., NonStopNet, Inc., Tivoli Systems, Inc. and the US Army.

Industry Background

      Forrester Research estimates the annual value of business-to-business products and services that will be sold in the United States over the Internet will exceed $2.7 trillion by 2004, and that 53% of that value will be processed through e-marketplaces. In addition, industry studies indicate that many companies are implementing their own enterprise information portals. Companies in virtually every industry are developing the capabilities to take advantage of this growing Internet economy, in many cases by augmenting or abandoning their traditional business models.

      Companies may choose to create or participate in e-marketplaces — content-rich, Web-based destinations that bring together many buyers, sellers and business prospects who seek aggregated information about products and services. For example, companies that have

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      Some companies are establishing their own e-business information portals — Web sites which act as single points of online access for enterprise customers, partners, suppliers and employees to find information, interact, obtain services and execute transactions. For example, a financial services company might offer to its customers a central access point to have personalized, real-time views of market data, check account balances, and then purchase securities or pay their bills online without leaving the Web site, even though much of the information resides elsewhere. Employees might access the same site for personalized views of their 401(k) account balances and to update their healthcare benefits records.

Challenges faced by companies deploying and participating in e-marketplaces and portals

      Companies face many business challenges in deploying or participating in e-marketplaces and portals, including:

	•	Time-to-scale. The global accessibility and reach of the Internet provides significant opportunities for new online entrants to rapidly displace slower competitors. This increases the importance of time-to-market for companies seeking to deploy or participate in e-marketplaces or portals. The success of an e-marketplace will depend largely on the early capture of a large number of buyers and sellers to create market liquidity and to attract further participants to the site. In many segments of the Internet economy, only a single e-marketplace or a few portals will dominate a market.
	•	Leveraging core business processes and systems. Companies have invested significant resources in developing business practices that provide them with competitive advantages. These companies want to incorporate these business practices into e-marketplaces, portals and other online extensions of their operations. For example, a distributor may benefit from its optimized logistics process and operating infrastructure. Similarly, a supplier might compete based on a process optimized for just-in-time production, or a media company may compete based on the depth and breadth of its digitized content.
	•	Constant change. E-marketplace and portal operators and participants work in an environment characterized by frequent disruptions and change. E-marketplaces involve complex business interactions ranging from hundreds to thousands of customers, partners, suppliers and employees. E-marketplace and portal participants are under constant pressure to adapt to dramatic growth, new business practices, intense competition and increasing complexity. Any change, such as the addition or loss of participants, should be accomplished in real-time without disrupting the information flow.
	•	Customer satisfaction. While e-marketplace and portal operators and participants seek to achieve high degrees of automation and economies of scale, they often fail to provide the level of customer attention and service that customers often expect will accompany any business-to-business and business-to-consumer interaction. For example, a recent Jupiter Communications study found that 42% of top-ranked Web sites either took longer than five days to reply to customer email inquiries, never replied or were not accessible by email. Many e-commerce sites do not integrate human interaction, such as customer service, into their overall e-business processes.

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      Companies need strong technological capabilities to address these significant business challenges which accompany the new models of e-business. Specifically, they need to address the following technical challenges:

	•	Connecting disparate systems. Business processes now span the extended enterprise of employees, customers, partners and suppliers, each of which rely on a broad range of incompatible applications and communications systems. META Group, Inc. estimates that the average company maintains 49 distinct enterprise applications and spends approximately 35% of its total IT budget on integration-related efforts, including internal development and consulting services as well as purchases of packaged solutions. Many of these applications were implemented in standalone fashion to address strategic business functions, including enterprise resource planning, supply chain management, customer relationship management, sales force automation, business decision support and e-commerce. These packaged applications typically were not designed to work with each other, much less with systems residing outside the enterprise. Yet e-marketplaces and information portals must be able to instantly access information from, and convey information to, these disparate systems.
	•	Aggregating content at the point of interaction. The emerging models of e-marketplaces and information portals depend significantly on the aggregation and organization of up-to-date information, including structured data such as price lists or employee records, or unstructured data such as product specifications or diagrams. Companies must access, aggregate, catalog and deliver in real-time, large volumes of information that reside in multiple and often incompatible data repositories. These challenges are compounded by the scale of many e-marketplaces or portals, which may contain product information from hundreds or thousands of suppliers, and by the security concerns of companies which are exposing some of their most valuable information over the Internet.
	•	Automating and monitoring business processes. A business process initiated at an e-marketplace or a portal will often require tracking and coordinating many sub-processes which may occur at different companies. For example, the process of taking and fulfilling an order at an e-marketplace might require checking inventory at the supplier, checking credit through a bank, creating an invoice, notifying a warehouse, delivering through a third-party logistics company and ultimately debiting the customer’s internal accounts receivable system. This process requires connectivity between applications and systems, and a sophisticated monitoring capability so that all participants can have complete visibility into the overall process, as well as the ability to integrate human interactions when necessary, such as handling exceptions that might cause transactions to fail.

      Attempts to solve these complex technical challenges have generally involved the approaches described below:

	•	in-house IT organizations using a collection of technologies and significant custom development to enable their companies to integrate with e-marketplaces or to create portals; or
	•	enterprise application integration (EAI) products that offer packaged solutions for establishing discrete connectivity between disparate applications within and between companies.

      Each of these approaches has achieved a level of success in creating point-to-point connections between applications. However, we believe that, even in combination, these

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	•	complex, cumbersome and time-consuming to implement, requiring significant amounts of custom coding to effectively deploy and extensive resources to manage;
	•	inflexible and difficult to scale, requiring considerable effort to add or modify participant information, content sources and business processes;
	•	unable to integrate people with technology, focusing instead on routing electronic messages from one machine to another; and
	•	lacking sufficient security to control the interactions between participants.

The Enterworks Solution

      Our product suite creates integrated, real-time catalogs of e-business content and automates e-business processes. Our products were developed to address the requirements of e-marketplaces and portals in an easy-to-use and highly manageable framework.

      We believe that our products provide the following strategic business benefits to e-marketplace participants and portal users:

	•	Faster time-to-market. Our products help enterprises launch e-marketplaces and portals quickly, and scale them faster, by integrating content sources wherever and in whatever form they currently exist. For example, a financial services firm that wants to offer its customers new services, such as consolidated account information through a portal, can use our products to catalog and deliver this information to the portal with minimal custom coding. By accommodating and integrating disparate business processes, our products increase the value and efficiency of e-marketplaces and portals for users, buyers and sellers.
	•	Increased customer satisfaction. We increase customer satisfaction by aggregating and delivering personalized content for greater value and higher levels of service. Customer relationships become stronger because the right information is available. Our business process management solutions increase customer satisfaction by handling problems faster and more effectively. With our products, the process for handling exceptions and responding to customer inquiries can be tailored to an individual customer’s needs, automated and made part of the customer experience.
	•	Improved supply chain interactions. By integrating marketplace participants’ disparate business processes, our products allow buyers and sellers to gain the efficiencies of e-marketplaces without losing the advantages of using their individual business policies and best practices. For example, a manufacturing organization that wants to more efficiently manage inventory levels across multiple plant facilities and between its suppliers and partners, can use our products to catalog, aggregate and deliver single views of inventory levels, even though each plant and most suppliers may be using different inventory management systems.
	•	Greater leverage of existing infrastructure investments. Our products allow enterprises to integrate and extend the many architectures and systems in which they have made significant investments, from legacy mainframe to newer client/server systems. Our products quickly adapt the functionality of these systems to e-marketplaces and portals and maximize the investments companies have already made.
	•	Reduced operational costs. Our products help our customers reduce their operating costs. By automating business processes, including exception handling, our products enable our customers to improve the efficiency of their operations, lessening their need

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		for personnel and custom coding. Our products also help our customers reduce their costs by providing them with organized and real-time business information. This information allows our customers to make informed decisions regarding their operations. For example, a healthcare organization that wants to manage its service delivery costs more effectively needs to understand the components of its costs on a patient by patient basis. Unfortunately, this information is often difficult to access because it is contained in many legacy and homegrown systems. Using our products, the organization can catalog, aggregate and view the information, individually by patient.

      Our content and process integration solutions are differentiated through the following design points and technical features:

	•	Ease of use and speed of implementation. Our products deliver content to, and provide process management through, whatever user interface is most familiar to e-marketplace participants and portal users. Our products offer their own user interfaces as well, combining the simplicity of a browser-based environment with a user interface typical of common operating systems. Our products support rapid implementation by allowing our customers not only to create customized, integrated views of content, but to test and refine those views in real time before rolling them out to e-marketplace participants and portal users.
	•	Flexibility and adaptability to change. Our products store the content and process models as a collection of objects making them readily available to be reused or modified. As the set of e-marketplace participants and portal users grows, it remains easy to manage and deliver personalized views of information and business processes. All of our tools support re-use of content and process models.
	•	Integration of people. By delivering content specific to an individual’s requirements and seamlessly integrating people into business processes, our products offer a distinct advantage over products that offer little more than message delivery between applications.
	•	Proven security. Our products enable secure operation among organizations using the Internet. Our products use digital certificates for authentication and privacy, are compatible with standard certificate management solutions and support encrypted links through Secure Sockets Layer, or SSL, an industry-standard encryption language.
	•	Greater scalability. Our software is designed to operate in a distributed environment and take full advantage of the Internet. Our products can be segmented and hosted on multiple platforms within an enterprise and on platforms at customer and partner sites.

The Enterworks Strategy

      Our objective is to become the leading provider of integration software for powering e-business. To achieve this objective, we are pursuing the following strategic initiatives:

	•	Increasing awareness of Enterworks and our e-marketplace and portal solutions. To strengthen our market position, we are continuing to increase the visibility of Enterworks and our Enterworks Content Integrator and Enterworks Process Integrator products among potential customers, partners and industry leaders. To achieve increased awareness, we are emphasizing key elements of our products through multiple branding programs, including participation in industry conferences and other events. In addition, we are placing bylined articles and pursuing key editorial opportunities in influential publications, and increasing our advertising in selected trade and business publications.
	•	Expanding our sales efforts. We are aggressively targeting our marketing and sales promotion programs at e-marketplace and portal builders, operators and participants. We are increasing our sales lead generation programs directed at high level business

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		and technical executives in multiple key industries. In 1999, we more than doubled the size of our direct sales force and we plan to significantly increase this number over the next twelve months. We are recruiting sales representatives experienced in selling into certain vertical markets, including healthcare, manufacturing and the public sector. We are also increasing our staff of sales engineers, and we are expanding our telesales organization to supplement the efforts of our direct sales representatives.
	•	Broadening our installed base. We intend to broaden our installed user base because we believe that as more users interact with our products, the value our products provide our customers will increase. Additionally, as more customers purchase our products, our ability to customize content and business processes becomes more visible to both our existing and potential customers. To broaden our installed base we have designed scalable products and several product pricing and packaging alternatives that meet the needs of organizations of various sizes and stages of development.
	•	Building and leveraging partnerships. We are expanding our existing relationships and creating new partnerships under our E-Alliance Program with traditional system integrators, e-business professional services companies, and other software vendors and technology partners. We have developed several partners in each of these categories. See “E-Alliance Program.” In early 1999, we established a separate team of experienced partnership development professionals which we expect to significantly increase in the next twelve months. Our partnerships enable us to access prospective customers that we might not otherwise reach and scale our business more quickly and at lower marketing cost.
	•	Enhancing technology leadership. We are investing significant resources in our R&D organization to strengthen the core functionality of our products and add industry-specific extensions. We may also consider acquiring key technologies that significantly differentiate us in the segments in which we compete. To ensure that we meet the needs of our customers we believe we must rapidly add new technologies to our products. We plan to demonstrate continued technical leadership through new technology that we will build or acquire.