Edgar Filing: EPRESENCE INC

FORM 10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

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

For the fiscal year ended December 31, 2003

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

For the transition period from to

Commission File No. 000-20364

ePresence, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Massachusetts

04-2798394

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer Identification No.)

120 Flanders Road, Westboro, Massachusetts 01581

(Address and Zip Code of Principal Executive Offices)

508-898-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the last sale price on the NASDAQ National Market on June 30, 2003 was approximately $47,235,500. For this purpose, any officer, director or known 10% stockholder of the Company is deemed to be an affiliate. The Registrant has no shares of non-voting Common Stock authorized or outstanding.

On March 5, 2004, there were 22,816,470 shares of Common Stock outstanding.

EXPLANATORY NOTE

The purpose of this Amendment No. 1 to the Annual Report on Form 10-K of ePresence, Inc. (the “Company”) for the year ended December 31, 2003 originally filed with the Securities and Exchange Commission on March 30, 2004 (the “Original Form 10-K”) is to amend and restate in their entirety Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 Financial Statements and Supplementary Data in connection with the comments received from the Securities and Exchange Commission on April 30, 2004 related to the preliminary proxy materials filed by the Company on April 13, 2004. Item 10 Directors and Executive Officers of the Registrant is being filed to correct a scrivener’s error in the Registrant’s Code of Business Conduct and Ethics.

This Amendment No. 1 to Form 10-K does not reflect events occurring after the filing of the Original Form 10-K, or modify or update those disclosures (including disclosures relating to risks, uncertainties and other factors that may affect the Company’s future performance) in any way, except as required to reflect the effects of the changes discussed.

ePresence, Inc.

Index to Annual Report on

Form 10-K/A filed with the

Securities and Exchange Commission

Year Ended December 31, 2003

Items in Form 10-K


		Page No.
	PART II
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 8.	Financial Statements and Supplementary Data	28
Item 10.	Directors and Executive Officers of the Registrant

	PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	65
	Signatures	67

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K/A contains forward-looking statements that are subject to a number of risks and uncertainties, including, without limitation, information with respect to our plans and strategy for our business, statements relating to the sufficiency of cash and cash equivalent balances, anticipated expenditures, the anticipated effects of our cost reduction measures including the discontinuation of our operations in Europe and Australia, and our sales and marketing and product development efforts. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undo reliance on our forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “will”, “believe”, “anticipate”, “plan”, “expect” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, the factors set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Results” which is in Part II of this Annual Report on Form 10-K/A. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. We do not assume any obligation to update any of the forward-looking statements we make.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

ePresence has two reportable segments: services and Switchboard. Our reportable segments are managed separately as they are separately traded public companies, and market and distribute distinct products and services. See Note 21 Segment Information in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2003 which is incorporated from Item 8 herein.

ePresence is a consulting and systems integration company delivering Security and Identity Management (“SIM”) solutions that help companies reduce cost, enhance security, improve service and increase revenues. Identity management promotes effective management of users and access to the right information across IT environments, creating context and common infrastructure across distributed constituencies, business processes and applications. Our primary service offerings blend the elements of security and identity management, which include enterprise directory and security services, meta-directory services, access and password management services, single sign-on services, electronic provisioning services, information technology platform services, and managed operational services.

As of December 31, 2003, we owned approximately 51% of Switchboard’s outstanding common stock and, therefore, consolidate Switchboard’s results with our financial results. Switchboard is a leading provider of web hosted directory technologies and customized yellow pages platforms to yellow pages publishers, newspaper publishers and Internet portals that offer online local directory advertising solutions to national retailers and “brick and mortar” merchants across a full range of Internet and wireless platforms.

In 2003, as a result of the performance of our services business which had experienced declining revenues and operating losses due to unfavorable economic conditions combined with decreased technology spending and increasing competition in our industry from companies with greater resources, the Board of Directors decided to pursue strategic initiatives to enhance stockholder value.

On October 23, 2003 we announced that we had signed a definitive agreement to sell the assets of our services business to Unisys Corporation (NYSE:UIS) for approximately $11.5 million in cash. These assets include ePresence’s customer relationships and industry partnerships, and a majority of the Company’s employees are expected to become employees of Unisys. The transaction is subject to the approval of ePresence stockholders and other closing conditions, and is expected to be completed by the second quarter of 2004. We also announced that our Board of Directors has approved a plan of liquidation of ePresence. On March 26, 2004, we announced that Swithboard agreed to be acquired by InfoSpace, Inc., subject to stockholder approval. We have filed a preliminary proxy statement, dated November 6, 2003 and amended on December 18, 2003 and January 14, 2004, regarding these matters, and will file an amendment to the proxy statement to reflect the Switchboard merger proposal.

In connection with ePresence’s plans to liquidate and dissolve, we have incurred approximately $7.4 million as of December 31, 2003, related to the termination of a vendor relationship, subsidiary dissolution costs, the settlement of certain customer arrangements, severance costs, legal, accounting, investment banking and other professional fees and expenses.

Upon sale of assets to Unisys, the sale of Switchboard shares and the liquidation and dissolution, the Company will cease all operations and activities other than the winding-up of our affairs.

In the event of stockholder approval of the plan of liquidation, we would be required to adopt a liquidation basis of accounting (See Note 3 to Consolidated Financial Statements – “Pro Forma Consolidated Statement of Net Assets Available in Liquidation”. Accordingly, we would no longer report a balance sheet but would instead report a consolidated statement of net assets available in liquidation, which would not include a stockholders’ equity section. In the consolidated statement of net assets available in liquidation, our assets would be valued at

their estimated net realizable value and liabilities would include the estimated costs associated with carrying out the plan of liquidation. In addition, we would no longer report a consolidated statement of operations but instead would report a consolidated statement of loss and changes in net assets.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. On October 23, 2003, we announced our intention to liquidate, satisfy our remaining obligations and make one or more distributions to our stockholders of cash available for distribution. The plan of liquidation is subject to stockholder approval. As more fully described in Note 3 to the financial statements included in this annual report, if the plan of liquidation is approved, the financial statements will then be prepared on a liquidation basis of accounting.

SERVICES RESULTS OF OPERATIONS

The following table presents ePresence’s services statement of operations information, as well as ePresence’s services statement of operations information stated as a percentage of total net ePresence revenue:

(in thousands)


	Years Ended December 31,
	2003							2002							2001

Services:	Amount			As a % of Net Revenue		% Change 2002 to 2003		Amount			As a % of Net Revenue		% Change 2001 to 2002		Amount			As a % of Net Revenue

Revenues	$	16,547				(48	)%	$	32,077				(38	)%	$	51,711
Cost of revenues		11,718		71	%	(46	)%		21,649		67	%	(39	)%		35,777		69	%

Gross profit		4,829		29	%	(54	)%		10,428		33	%	(35	)%		15,934		31	%
Operating expenses:
Sales and marketing		6,035		36	%	(42	)%		10,329		32	%	(42	)%		17,706		34	%
General and administrative		8,658		52	%	(22	)%		11,078		35	%	(26	)%		15,011		29	%
Amortization of goodwill and intangibles		—		0	%				—		0	%	(100	)%		2,668		5	%
Termination of a vendor relationship		6,500		39	%				—		0	%				—		0	%
Impairment of goodwill		—		0	%	(100	)%		14,779		46	%	20	%		12,364		24	%
Restructuring and other charges		—		0	%	(100	)%		5,100		16	%	29	%		3,953		8	%

Total operating expenses		21,193		128	%	(49	)%		41,286		129	%	(20	)%		51,702		100	%

Operating loss		(16,364	)	(99	)%	(47	)%		(30,858	)	(96	)%	(14	)%		(35,768	)	(69	)%

Other income/(expense), net		(159	)	(1	)%	(105	)%		3,204		10	%	(95	)%		69,771		135	%
Services net loss from operations before income taxes and cumulative effect of accounting change		(16,523	)	(100	)%	(40	)%		(27,654	)	(86	)%	(181	)%		34,003		66	%
Services (benefit)/provision for income taxes		(352	)	(2	)%	(471	)%		95		0	%	(99	)%		11,025		21	%

Services net loss before cumulative effect of accounting change		(16,171	)	(98	)%	(42	)%		(27,749	)	(87	)%	(221	)%		22,978		44	%
Cumulative effect of accounting change, net of tax of $1,855		—							—				(100	)%		3,445		7	%

Services net loss	$	(16,171	)	(98	)%	(42	)%	$	(27,749	)	(87	)%	(205	)%	$	26,423		51	%

Services Revenues

The decrease in services revenues in 2003 was due to lower revenues from our consulting services and managed operational services which declined $8.3 million and $4.6 million, respectively in 2003 due to decreased and deferred technology spending, increased competition and declines in our legacy support services revenues. Also contributing to the decline in revenues during 2003 was a reduction in third party products revenue from 2002 of $2.6 million The decrease in 2002 from 2001 was principally due to lower revenues from our consulting business which declined $7.1 million in 2002 due to unfavorable economic conditions leading to decreased and deferred technology spending, and from significant declines in revenues from our portal solutions business of $5.6 million. The decrease was also due to declines in revenues from our legacy support services of $4.8 million, as well as a reduction of $2.6 million in revenues from our operations in Germany and the United Kingdom, which we exited in 2002.

As a result of the closure of our remaining international operations in the United Kingdom and Germany, there were no international revenues for 2003 which compared with $0.2 million in 2002 and $4.8 million in 2001.

Services Gross Profit

The decrease in gross profit dollars and percentage in 2003 were primarily due to decreases in revenues noted above, mitigated in part by reductions in cost of services as a result of a reduction of personnel, which decreased at a slower pace than revenues. The increase in gross profit dollars and percentage for 2002 was primarily due to cost reduction initiatives in our consulting services delivery which resulted in increased utilization of our consulting resources. Cost of revenues consists primarily of direct costs (i.e. compensation) of consulting delivery personnel and third party product costs.

Services Operating Expenses

The decrease in sales and marketing expenses in 2003 was primarily due to the effects of our previous restructurings that resulted in cost reductions in our domestic sales operations, principally in the form of staff reductions and office closures including the elimination of our portal solutions operations. As a result, salaries and related costs for sales and marketing decreased $2.7 million. Additionally, promotional expenses declined $0.5 million in 2003. The decrease in 2002 was principally due to cost reductions in our portal solutions operations of $3.1 million, staff reductions and office closures in our other domestic services operations of $1.4 million and the closing of our operations in the United Kingdom and Germany resulting in cost reductions of $1.7 million. Sales and marketing expenses consist primarily of salaries, associated employee benefits and travel expenses of sales and marketing personnel and promotional expenses.

The decrease in general and administrative expenses in 2003 was primarily attributable to staff reductions and related costs of $1.9 million and lower bad debt expense of $ 0.5 million. This decrease was offset partially by professional services expenses of $0.7 million incurred in 2003 as a result of the Company’s strategic initiatives. The decrease in 2002 was primarily attributable to a reduction in facility costs of $1.4 million, lower depreciation expense of $0.9 million, staff reductions and related costs of $0.9 million and lower bad debt expense of $0.4 million. This decrease was offset partially by professional services expenses incurred in 2002 as a result of amendments to our Annual Report on Form 10-K for the year ended December 31, 2001 and the restatement of the financial statements included therein, and amendments to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. General and administrative expenses consist primarily of compensation, benefits and travel costs for employees in our management, finance, human resources, information services, and legal groups; recruiting and training costs for delivery personnel; costs for facilities; and depreciation expenses not allocated to sales or cost of revenues.

Services Termination of Vendor Agreement

On January 11, 1999, we established a strategic alliance with Microsoft Corporation to deliver integrated messaging, networking and Internet solutions and the collaboration on the design and implementation of packaged services, solutions and support offerings based on Microsoft’s enterprise platform. Under the agreement, Microsoft contributed $8.4 million to fund these initiatives and for certain marketing and product development efforts and the purchase of 1,750,000 common stock warrants. In October 2003, we terminated the alliance agreement by paying Microsoft $6.5 million in settlement of any further obligations under the agreement and cancellation of the common stock warrants.

Services Amortization of Goodwill and Intangibles

There was no amortization of goodwill expenses for our services business in 2003 or 2002 compared with $2.7 million in 2001. The decrease in 2002 was due to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Upon the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. Amortization expense as a percentage of services revenues was 5% for 2001. During 2002 we determined that the carrying value of goodwill recorded in connection with these prior acquisitions was impaired. Impairment charges totaling $14.8 million and $12.4 million respectively were recorded in 2002 and 2001, respectively, reflecting the amount by which the carrying amount of the assets exceeded their respective fair values. As of December 31, 2002 our goodwill was fully written off.

Services Restructuring Charges

During 2002, as part of our plan to focus on cost reductions while transitioning to a sales model that aims to lower our cost of sales and capitalize on the strength of our relationships with industry leaders, we recorded total pre-tax charges of $5.1 million. The restructurings were focused principally on the closure of our offices in Germany and the United Kingdom, reductions in our marketing and general and administrative functions and the elimination of several senior management positions. These charges included workforce reductions of approximately 75 positions, office closures and asset write-offs. At December 31, 2003, we had utilized approximately $3.7 million in total of the liability of which $1.5 million was severance related costs, and the remainder related to office closures and asset write-offs. The remaining liability at December 31, 2003 was approximately $1.5 million. We anticipate that we will utilize a substantial portion of the remaining liability by the end of fiscal year 2004. We expect to use $1.5 million of cash related to these activities of which a substantial portion is expected to be expended by the end of fiscal year 2004. See Note 11, Restructuring Charges, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2003, which is incorporated from Item 8 herein.

During 2001, as part of our plan to implement cost-cutting measures in the services business, we recorded in total net pre-tax charges of $4.0 million related to workforce reductions, office closures and asset write-offs. At December 31, 2003, we had utilized approximately $3.5 million in total of the liability of which approximately $2.0 million was severance related costs, and the remainder related to office closures and asset write-offs. The remaining liability at December 31, 2003 was approximately $0.4 million of cash related expenditures. See Note 11, Restructuring Charges, in our Notes to Consolidated Financial Statements for the year ended December 31, 2003, which is incorporated from Item 8 herein.

Services Other Income/(Expense) and Income Taxes

The decrease in services other income in 2003 is primarily due to the change in the minority interest share of income in Switchboard of $2.9 million as well as a reduction in interest income and realized gains as a result of lower interest rates and less funds available for investment. The decrease in 2002 was primarily due to the

liquidation of our Openwave position in 2001 resulting in a net gain of $33.4 million as well as the change in the minority interest share of decreased losses in Switchboard of $33.1 million and a reduction in interest income of $1.4 million.

While we incurred significant pretax losses in 2003, 2002 and 2001, we recorded a provision for income taxes in each of those years. The provision for income taxes in 2003 and 2002 is primarily for state income taxes and in 2003 was offset by a federal income tax refund of $0.4 million. We recorded no tax benefit on our operating losses for the years ended December 31, 2003 and 2002, due to the uncertainty of its realization. The provision for income taxes in 2001 is primarily the result of the significant gain on the sale of Openwave stock and due to the fact that Switchboard’s results (and net operating losses) are not consolidated with ours for income tax purposes.

We periodically evaluate the realizability of our deferred tax assets. Because we believe it is more likely than not that all of the deferred tax assets will not be realized, we have provided a full valuation allowances against our net deferred tax assets.

Services Other Matters

On January 1, 2001 we were party to two separate hedging contracts related to our investment in Openwave. Since we did not designate these hedges, the fair market value of these hedges ($5.3 million at January 1, 2001) was recorded as an asset and, accordingly, we recorded a cumulative effect in accounting change, net of taxes, of $3.5 million (an earnings per share impact of $0.15). Upon liquidation of the Openwave investment, these hedges were terminated and were offset against the gain from the sale of Openwave. These changes had no effect our consolidated net income for the period ending December 31, 2001. Aside from these hedges, at January 1, 2001 and through December 31, 2001, we were not party to any other derivative instruments.

For a further discussion of the our relationship with Switchboard, see Note 25, Related Parties, in our Notes to Consolidated Financial Statements for the year ended December 31, 2003 which is incorporated from Item 8 herein. For a further discussion of Switchboard’s relationship with AOL, see Note 24, AOL Alliance in our Notes to Consolidated Financial Statements for the year ended December 31, 2003 which is incorporated from Item 8 herein.

Switchboard Results of Operations

The following table presents Switchboard’s consolidated statement of operations information, as well as Switchboard’s consolidated statement of operations information stated as a percentage of total net Switchboard revenue:


																Change
	2003					2002					2001					2002 to 2003					2001 to 2002
	Amount			As a % of net revenue		Amount			As a % of net revenue		Amount			As a % of net revenue		Amount			%		Amount			%
Net Switchboard revenue:
Merchant network	$	13,428		88.4	%	$	10,327		87.9	%	$	6,209		66.9	%	$	3,101		30.0	%	$	4,118		66.3	%
National banner and site sponsorship		1,764		11.6	%		1,420		12.1	%		3,069		33.1	%		344		24.2	%		(1,649	)	(53.7	)%

Total net Switchboard revenue		15,192		100.0	%		11,747		100.0	%		9,278		100.0	%		3,445		29.3	%		2,469		26.6	%
Cost of revenue		2,925		19.3	%		3,744		31.9	%		3,518		37.9	%		(819	)	(21.9	)%		226		6.4	%

Gross profit		12,267		80.7	%		8,003		68.1	%		5,760		62.1	%		4,264		53.3	%		2,243		38.9	%
Sales and marketing		3,264		21.5	%		4,683		39.9	%		24,606		265.2	%		(1,419	)	(30.3	)%		(19,923	)	(81.0	)%
Research and development		4,263		28.1	%		5,446		46.4	%		6,702		72.2	%		(1,183	)	(21.7	)%		(1,256	)	(18.7	)%
General and administrative		3,335		22.0	%		4,057		34.5	%		4,181		45.1	%		(722	)	(17.8	)%		(124	)	(3.0	)%
Amortization of goodwill, Intangibles and other Assets		—		—			—		—			719		7.7	%		—		—			(719	)	(100.0	)%
Loss on Viacom transaction		—		—			—		—			22,203		239.3	%		—		—			(22,203	)	(100.0	)%
Special charges (credits)		(35	)	(0.2	)%		(262	)	(2.2	)%		17,324		186.7	%		227		(86.6	)%		(17,586	)	(101.5	)%

Total Operating expenses		10,827		71.3	%		13,924		118.5	%		75,735		816.3	%		(3,097	)	(22.2	)%		(61,811	)	(81.6	)%

Switchboard Operating (loss) income		1,440		9.5	%		(5,921	)	(50.4	)%		(69,975	)	(754.2	)%		7,361		124.3	%		64,054		91.5	%
Other income, net		676		4.4	%		1,962		16.7	%		3,221		34.7	%		(1,286	)	(65.5	)%		(1,259	)	(39.1	)%

(Loss) income before income taxes		2,116		13.9	%		(3,959	)	(33.7	)%		(66,754	)	(719.5	)%		6,075		153.4	%		62,795		(94.1	)%
Provision for income Taxes		42		0.3	%		—		—			—		—			42		n/a			—		—

Switchboard net income (loss)	$	2,074		13.7	%	$	(3,959	)	(33.7	)%	$	(66,754	)	(719.5	)%	$	6,033		152.4	%	$	62,795		(94.1	)%

Switchboard Revenue

The increase in net merchant network revenue in both 2003 and 2002 was due primarily to a reduction in amortization of consideration given to AOL as a result of the elimination of such amortization in August 2002 upon the amendment to the Directory Agreement with AOL. There was no amortization of consideration provided to AOL in 2003. Amortization of consideration given to AOL totaled $2.0 million and $4.0 million in 2002 and 2001, respectively. Switchboard does not expect to incur amortization of consideration given to AOL in the future during the remainder of the term of its current agreement. The increase in net merchant network revenue in 2003 was also attributable to an increase in of $2.1 million in licensing revenue from new and existing directory technology licensees exclusive of AOL. Offsetting these increases in 2003 was a decrease in gross revenue from AOL of $0.6 million. The decrease in revenue from AOL was due primarily to a decrease of $1.2 million in AOL licensing revenue which resulted primarily from a decrease in the rate by which Switchboard shared in directory advertisement revenue from AOL as a result of the achievement of pre-determined cumulative revenue milestone, as well as the effects of the October 2003 amendment to the Directory Agreement.

The increase in 2002 as compared to 2001 was also attributable to increases in merchant licensing and other services revenues of $2.5 million from AOL as well as Switchboard’s other existing directory technology licensees, offset in part by a decrease of $0.5 million in local merchant website hosting services.

The increase in national banner advertising and site sponsorship revenue in 2003 resulted primarily from the addition of new customers and an increase in revenue from existing customers. The increase in revenue from existing customers was due primarily to an increase in the rate charged to those existing customers and additional advertising placements on Switchboard’s site, as well as an increase in traffic to Switchboard’s website. Switchboard believes that they increased rates were possible in part due to the improvement in general demand for national banner and site sponsorship advertising during 2003. The decreases in national banner advertising and site sponsorship revenue in 2002 resulted from a decrease in both the number of advertisers on the site, as well as the per impression fee charged to those customers. Switchboard attributes the 2002 decrease to a decline in general demand for national banner advertising and site sponsorship on the Internet during 2002, as well as the overall state of the U.S. economy.

In 2003, 2002 and 2001, AOL accounted for 41.2%, 41.8% and 0.3% of net Switchboard revenue, respectively. In the year ended December 31, 2001, one customer accounted for 11.6% of net Switchboard revenue. There was no revenue in 2003 or 2002 generated from barter transactions, in which Switchboard received promotion in exchange for promotion on Switchboard’s website. Revenue from barter transactions was 9.0% of net Switchboard revenue in 2001.

Switchboard Cost of Revenues

The decrease in cost of revenue in 2003 was primarily attributable to a decrease of $0.3 million in the cost of third-party data, a decrease of $0.3 million in website creation and hosting fees in connection with Switchboard’s merchant services programs and a decrease of $0.2 million in data communications expense. These decreases in 2003 were offset in part by an increase of $0.2 million in search engine database inclusion expense.

In 2002, Switchboard incurred an increase of $0.4 million in depreciation associated with additional equipment necessary to support Switchboard’s website and those of Switchboard’s directory technology licensees; an increase of $0.2 million in the cost of third-party data; and an increase in revenue from lower margin merchant network services as compared to 2001. These increases were offset in part by a decrease of $0.3 million in third-party website creation and hosting expenses associated with Switchboard’s merchant programs and a decrease of $0.2 million in equipment related expenses incurred to support Switchboard’s directory and the directories of Switchboard’s licensees.

Switchboard Gross Profit

The increase in gross profit dollars and percentage in 2003 was due primarily to an increase in net revenue being spread over lower costs of revenue. In 2003, Switchboard reduced its fixed costs of revenue by lowering its data communication expenditures and the cost of obtaining third party data. The increase in gross profit dollars and percentage in 2002 was primarily due to an increase in net revenue being spread over relatively fixed costs of revenue, offset in part by an increase in lower margin merchant network services revenue.

Switchboard Operating Expenses

The decrease in sales and marketing expense in 2003 was primarily due to a decrease of $0.6 million in merchant program expenses and a $0.2 million reduction of expense as a result of a payment from AOL for the final settlement of Switchboard’s prior agreement with AOL, which was terminated in March 1999. The decrease in 2003 was also due, to a lesser extent, to decreases of $0.2 million in public relations expense and $0.2 million in facilities expenses.

The decrease in sales and marketing expense in 2002 as compared to 2001 was primarily related to the elimination of the non-cash advertising expense related to Switchboard’s former agreement with Viacom, which accounted for $9.7 million of Switchboard’s sales and marketing expense during 2001. The decrease in 2002 was also attributable to decreases of $6.1 million in other corporate marketing program expenses, $2.0 million in employee salaries and benefits resulting primarily from actions taken during Switchboard’s corporate restructuring activities in the three months ended December 31, 2001, $0.9 million in provisions for doubtful accounts and $0.8 million in merchant program expenses.

The decrease in research and development expense in 2003 was due primarily to decreases of $0.5 million in salaries and benefits, $0.3 million in costs associated with leased facilities as a result of more favorable lease terms under Switchboard’s agreements with ePresence and $0.2 million in consulting expense. The decrease in 2002 was due primarily to decreases of $0.6 million in outside consulting, $0.3 million in employee salaries and benefits, $0.2 million in costs associated with leased facilities primarily as a result of the elimination of a leased facility in 2002 associated with Switchboard’s Envenue acquisition and $0.1 million in recruiting expenses. These decreases in employee salaries and benefits in both 2003 and 2002 were primarily the result of decreases in the number of employees performing research and development activities.

The decrease in general and administrative expense for 2003 was primarily due to the $0.7 million Switchboard incurred in the 2002 period for professional services related to the amending of Switchboard’s Annual Report on Form 10-K for the year ended December 31, 2001 and Switchboard’s Quarterly Report on Form 10-Q for the three months ended March 31, 2002 and the restatement of the financial statements included therein. The decrease in general and administrative expense in 2003 was also due, to a lesser extent, to a decrease of $0.1 million in insurance expense and the reduction of expense of $0.1 million due to Switchboard’s revised estimate of the liability required for potential damages resulting from a class action lawsuit filed against Switchboard and certain of Switchboard’s current and former officers. These decreases were offset in part by separation benefit expenses of $0.2 million resulting the resignation of Switchboard’s Chief Executive Officer.

The decrease in general and administrative expense in 2002 in comparison to 2001 was primarily due to a decrease of $0.8 million in salaries and benefits resulting primarily from actions taken during Switchboard’s corporate restructuring activities in the three months ended December 31, 2001 and a decrease of $0.3 million in costs associated with leased facilities, offset in part by an increase of $0.8 million in expenses for professional services incurred primarily as a result of amendments to Switchboard’s Annual Report on Form 10-K for the year ended December 31, 2001 and Switchboard’s Quarterly Report on Form 10-Q for the three months ended March 31, 2002 and the restatement of the financial statements included therein.

On October 23, 2003, Switchboard filed a Registration Statement on Form S-1 in connection with a proposed underwritten offering of its common stock. The offering was initiated by ePresence in order to facilitate an orderly disposition of its Switchboard holdings in conjunction with its announced plan of liquidation. As of December 31, 2003, Switchboard had incurred $511,000 of costs associated with the offering. Switchboard recorded these deferred offering costs as a long-term asset on its balance sheet as of December 31, 2003. Switchboard expects to abandon this offering and record expense for these deferred offering costs in full, as well as any other costs associated with this offering subsequent to December 31, 2003, as a component of operating expenses in the three months ended March 31, 2004.

Switchboard Amortization of Goodwill, Intangibles and Other Assets

Amortization of goodwill, intangibles and other assets in 2001 consisted primarily of amortization of goodwill resulting from Switchboard’s acquisition of Envenue, which was written down to zero as of December 2001 as a result of an impairment analysis, and amortization expense associated with a software license, which was fully amortized as of December 2001.

Switchboard Loss on Viacom Transaction

As a result of Switchboard’s October 2001 restructuring of Switchboard’s relationship with Viacom, Switchboard reported a one-time, non-cash accounting loss of $22.2 million in 2001 related to the termination of Switchboard’s advertising and promotion agreement with Viacom. Switchboard agreed to terminate its right to the placement of advertising on Viacom’s CBS properties with an expected net present value of approximately $44.5 million in exchange for, primarily, the reconveyance by Viacom to us of approximately 7.5 million shares of Switchboard’s common stock, the cancellation of warrants held by Viacom to purchase 533,469 shares of Switchboard’s common stock and the reconveyance to us of the one outstanding share of Switchboard’s series E special voting preferred stock. The non-cash accounting loss of $22.2 million results from the difference between the net present value of Switchboard’s remaining advertising rights with Viacom, which were terminated, and the value of the shares of Switchboard’s common and preferred stock that were reconveyed and the warrants that were cancelled.

Switchboard Special (Credits)/Charges

In 2003, Switchboard recorded the reversal of $35,000 in excess restructuring reserves. This reversal resulted from a revision of an estimate of termination benefits for which Switchboard had reserved as part of its 2001 special charges. It was determined in 2003 that the reserve for such benefits was no longer required. In 2002, Switchboard recorded the reversal of $0.3 million in excess restructuring reserves as a special credit. This reversal resulted primarily from better than expected experience in the subleasing of idle office space for which Switchboard had reserved as part of its 2001 special charges.

In December 2001, Switchboard recorded net pre-tax special charges of approximately $17.3 million, comprised primarily of $15.6 million for the impairment of certain assets, $1.0 million for costs related to facility closures and $0.7 million in severance costs related to the reduction of approximately 21% of Switchboard’s workforce. The restructuring resulted in 21 employee separations. These facility closures and employee separation activities were substantially completed during 2002.

Included in the $15.6 million charge for the impairment of certain assets is an amount recorded for the impairment of the unamortized portion of the value of the common stock issued and amounts prepaid to AOL. Switchboard assessed the value of its assets related to Switchboard’s AOL Directory Agreement for impairment as revenues were lower at the end of the first year of the Directory Agreement than originally anticipated. Based upon an impairment analysis that indicated that the carrying amount of these assets would not be fully recovered through estimated undiscounted future operating cash flows, a charge of $11.7 million was recorded as an additional component of special charges during 2001. This impairment analysis was performed in September 2002 as part of Switchboard’s restatement of Switchboard’s Annual Report on Form 10-K for the year ended December 31, 2001. The impairment was measured as the amount by which the carrying amount of these assets exceeded the present value of the estimated discounted future cash flows attributable to these assets.

In December 2001, Switchboard exercised its rights under the Envenue acquisition agreement to substantially reduce the funding of Envenue. Switchboard evaluated the carrying value of Switchboard’s goodwill in Envenue, and determined it would not be fully recovered through estimated undiscounted future operating cash flows. As a result during the three months ending December 31, 2001, Switchboard recorded as a component of the $15.6 million impairment charge for certain assets an impairment charge of $1.9 million related to the Envenue goodwill. The impairment was measured as the amount by which the carrying amount of these assets exceeded the present value of the estimated discounted future cash flows attributable to these assets.

Also included in the impairment charge for certain assets are amounts related to prepaid advertising expenses. As a result of Switchboard’s change in overall strategy from a destination site to a technology provider, Switchboard no longer considered this prepaid advertising to be complementary to Switchboard’s corporate strategy. Accordingly, Switchboard recorded $1.4 million for the impairment of these prepaid advertising assets.

Of the total $1.3 million facilities and severance charge, which is net of the $35,000 and $0.3 million special credits recorded in 2003 and 2002, respectively, $1.1 million is cash-related. Switchboard has a remaining liability of $10,000 on its balance sheet as of December 31, 2003 for the 2001 special charges related primarily to our remaining net lease obligations for a closed facility.

Switchboard Other Income and Income Taxes

The decrease in Switchboard’s other income in 2003 was due primarily to a decrease of $1.1 million in interest income earned as a result of a decline in interest rates, as well as a decrease of $0.4 million in realized gains on investments. These decreases in 2003 were offset in part by a decrease of $0.1 million in interest expense primarily due to the repayment of all amounts due under Switchboard’s equipment financing in June 2003. The decrease in 2002 was due primarily to a decrease in interest income earned as a result of reduced funds available for investment and a decline in interest rates, and an increase of $0.1 million in interest expense incurred primarily as a result of Switchboard’s financing of equipment purchases made during 2001 and 2002, offset in part by a loss on disposal of fixed assets in 2001.

Switchboard did not have a significant tax provision in 2003. Switchboard is subject to minimum state alternative minimum taxes. Switchboard recorded income tax expense of $42,000 in 2003. A portion of Switchboard’s net operating losses were created by excess tax benefits associated with stock options and will be realized through increases to shareholders equity when utilized.

Switchboard did not provide for income taxes in 2002 and 2001 due to significant pre-tax losses. Switchboard did not record a benefit for income taxes as it believes it is more likely than not that net operating losses and tax credits will not be fully utilized. In assessing the realizability of deferred tax assets, Switchboard considered whether it is more likely than not that it will not fully use some or all of the deferred tax assets. Switchboard believes that sufficient uncertainty exists regarding the realizability of the deferred tax assets such that a valuation of $39.9 million and $40.3 million for December 31, 2003 and 2002, respectively, has been established for deferred tax assets.

As of December 31, 2003, Switchboard had net operating loss carry-forwards for federal and state tax purposes of approximately $87.8 million and $87.8 million, respectively. The federal and state net operating loss carry-forwards will begin to expire in 2012 and 2003, respectively. Ownership changes resulting from Switchboard’s issuance or sales of capital stock may limit the amount of net operating loss carry-forwards that can be utilized by Switchboard annually to offset future taxable income. In general, the annual usage of net operating loss carry-forwards is limited to a company’s market value on the date of the change in control, multiplied by the federal long-term tax exempt rate. Switchboard believes that as a result of its secondary offering, such a limitation may occur. Switchboard’s net operating loss carry-forwards for federal and state tax purposes may be limited as a result of our secondary offering, which could increase Switchboard income tax expense and reduce our net income.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2003, consolidated cash, cash equivalents and marketable securities were $92.0 million, of which $36.1 million was held by ePresence and $55.9 million was held by Switchboard. At December 31, 2002, consolidated cash, cash equivalents, marketable securities and restricted cash were $105.3 million, of which $51.4 million was held by ePresence and $53.9 million was held by Switchboard. Consolidated working capital increased from $82.9 million at December 31, 2002 to $85.9 million at December 31, 2003. Consolidated working capital increased from $72.6 million at December 31, 2001 to $82.9 million at December 31, 2002. Cash and cash equivalents increased $3.3 million resulting in a consolidated cash balance of $ 76.5 million at December 31, 2003. This increase was primarily due to net cash used in operating activities of $12.4 million and cash used in financing activities of $0.4 million offset in part by cash provided by investing activities of $16.0 million as follows.

Net cash used in operating activities in 2003 of $12.4 million was primarily due to a consolidated net loss of $14.1 million, a decrease in accounts payable and accrued expenses of $2.9 million and a decrease in deferred revenues of $0.2 million. These uses were offset in part by a decrease in accounts receivable of $1.1 million, amortization of loan forgiveness and unearned compensation of $1.1 million, an increase in minority interest of $1.0 million and depreciation and amortization of $1.9 million.

Net cash used in financing activities in 2003 of $0.4 million was primarily due to payments on capital leases by Switchboard of $2.2 million and payment by Switchboard to settle Envenue litigation of $1.7 million, offset, in part, by proceeds from issuance of common stock in Switchboard of $3.1 million as a result of stock option exercises and payment of a note receivable.

Net cash provided by investing activities in 2003 of $16.0 million was primarily related to the proceeds from sale of marketable securities of $14.7 million and a decrease in restricted cash of $1.6 million, offset, in part, by capital expenditures of $0.3 million.

On December 18, 2000, the Board of Directors of ePresence authorized the repurchase of up to $10.0 million of our common stock on the open market. Repurchases of stock are at management’s discretion, depending upon acceptable prices and availability. Funds used in the repurchase of shares come from our existing cash and investment balances along with cash generated from operations. As of December 31, 2003, we had expended $7.4 million toward stock repurchases pursuant to this repurchase program of which $7.4 million was expended prior to December 31, 2003. ePresence does not anticipate purchasing any additional shares, pending the outcome of our proposed Asset Sale, sale of Switchboard shares and liquidation.

For a discussion of our lease commitments, see Note 12, Commitments and Contingencies, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2003 which are incorporated from Item 8 herein.

The following table summarizes our consolidated long-term contractual obligations as of December 31, 2003:


	Less than 1 year		1-3 years		Total
	(in thousands)
Operating lease obligations	$	1,637	$	1,431	$	3,068
Other long-term obligations(a)		425		364		789

Total	$	2,062	$	1,795	$	3,857

(a)

Consists of scheduled payments under various Switchboard third-party data licensing agreements.

On November 7, 2002, we entered into a $10.0 million revolving line of credit with Silicon Valley Bank, that provides for borrowings at SVB’s prime rate. This credit agreement had a one-year term and was not renewed.

We believe that existing cash and marketable securities will be sufficient to fund our operations through at least the next 12 months notwithstanding our plans to liquidate and dissolve.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

SERVICES:

We consider certain accounting policies related to revenue recognition, accounts receivable, impairment of long-lived assets, valuation of deferred tax assets and accounting for stock based compensation to be critical policies due to the estimation processes involved in each.

Services Revenue Recognition

We recognize services revenues pursuant to time-and-material contracts generally as services are provided. Services revenues pursuant to fixed-fee contracts are generally recognized as services are rendered using the proportionate performance method of accounting (based on the ratio of costs incurred to total estimated costs) with revisions to estimates reflected in the period which changes become known. Service revenues include customer reimbursements for out-of-pocket expenses.

Our services business derives a significant portion of its revenue from fixed-price, fixed-time contracts, which require the accurate estimation of the cost, scope and duration of each engagement. If we do not accurately estimate the resources required or the scope of time to satisfy our obligations under the contracts, then future consulting margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to our results of operations.

Services Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our customers on an ongoing basis and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable at December 31, 2003 are concentrated in a relatively few number of customers (two customers accounts for 22% of consolidated accounts receivable at December 31, 2003), a significant change in the liquidity or financial position of any one of our significant customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.

Services Restructuring Charges

We established exit plans for each of the restructuring activities which took place in 2001 and 2002 and accounted for these plans in accordance with EITF Issue No. 94-3, “Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)” and SEC Staff Accounting Bulletin No. 100 (“SAB 100”), “Restructuring and Impairment.” In accordance with EITF Issue No. 94-3 and SAB 100, management makes certain judgmental estimates related to these restructuring charges. We specifically identified all positions which were to be eliminated and notified the affected employees prior to the end of the quarter in which the related restructuring charge was recorded. The consolidation of facilities required us to make estimates including with respect to contractual rental commitments or lease buy-outs for office space being vacated and related costs, and leasehold improvement write-downs, offset by estimated sub-lease income. We review on at least a quarterly basis our sub-lease assumptions. These estimates include anticipated rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. If the rental markets change, our sub-lease assumptions may not be accurate and changes in these estimates might be necessary but would not materially affect our financial condition and results of operations. For a further discussion of our restructuring activities, see Note 11, Restructuring Charges, in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2003, which are incorporated from Item 8 herein.

Services Impairment of Long-lived Assets

Our long-lived assets included goodwill and acquired intangible assets pursuant to our acquisition of ePresence, Inc. (currently named ePresence Web Consulting, Inc.) in January 2000 and our acquisition of Strategic Network Designs, Inc. (currently named ePresence CRM, Inc.) in May 2000. At December 31, 2001, we had $14.8 million of goodwill and other intangible assets, accounting for approximately 9.1% of our total

assets. We evaluate the net realizable value of our goodwill and intangibles on an ongoing basis, relying on a number of factors including operating results, business plans, budgets, economic projections and undiscounted cash flows. In addition, our evaluation considers non-financial data such as market trends, project development cycles and changes in management’s market emphasis. During 2001, based on economic conditions and each business units actual and forecasted operating results, it became apparent that the carrying value of the acquired intangible assets and goodwill had been impaired. In September 2001, a charge of $12.4 million was recorded related to the impairment of goodwill measured as the amount by which the carrying amount exceeded the present value of the estimated discounted future cash flows for goodwill.

In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, we ceased to amortize approximately $14.8 million of goodwill. We had recorded approximately $2.7 million of amortization during 2001 and would have recorded approximately $1.8 million of amortization during 2002. In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We adopted SFAS No. 142 during the first quarter of 2002 and ceased amortizing goodwill with a net book value of $14.8 million as of the beginning of fiscal 2002. We completed an assessment of fair value of goodwill in the second quarter of 2002 and updated the assessment in the third quarter of 2002 due to a continued decline in economic conditions. Neither of these assessments indicated an impairment of goodwill. However, in the fourth quarter of 2002, we completed our yearly assessment of fair value of goodwill, and based upon this impairment analysis, the results indicated that the carrying amount of the goodwill would not be fully recovered through estimated undiscounted future operating cash flows and an impairment charge of $14.8 million was recorded during the year ended December 31, 2002. The impairment of goodwill was measured as the amount by which the carrying amount exceeded the present value of the estimated discounted future cash flows attributable to such goodwill.

Services Valuation of Deferred Tax Assets

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $67.7 million as of December 31, 2003, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carryforwards and tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

The net deferred tax asset as of December 31, 2003 was zero, net of a valuation allowance of $67.7 million.

Services Accounting For Stock Based Compensation

We account for stock-based compensation for employees under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and elect the disclosure-only alternative under SFAS No. 123, “Accounting for Stock-Based Compensation” and provide the enhanced disclosures as required by SFAS No. 148, “Accounting

for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123”. SFAS 148 provides alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Had we chosen to voluntarily change to a fair value based method of accounting for stock-based employee compensation, we would have recorded additional expense in our services results of operations of $3.1 million in 2003, $5.8 million in 2002 and $7.0 million in 2001.

The Financial Accounting Standards Board is currently considering a proposal that would require companies to change to a fair value based method of accounting for stock-based employee compensation. If the FASB requires such a change in accounting for stock-based employee compensation, we may be required to record the expense associated with the fair value of stock-based employee compensation in our results of operations in future periods.

We are required in the preparation of the disclosures required under SFAS 148 to make estimates when ascribing a value to stock options granted during the year. These estimates include, but are not limited to, an estimate of the average time option grants will be outstanding before they are ultimately exercised and converted into common stock and an estimate of the future volatility in the market value of our common stock over that period in which the option grants are outstanding. These estimates are integral to the valuing of these option grants. Any changes in these estimates may have a material effect on the value we ascribe to these option grants. This would in turn affect the amortization used in the disclosures we make under SFAS 148, which could be material. Further, the rules governing accounting for option grants continue to evolve. Should we be required in future periods to include amortization of stock options, such amortization would have a material adverse effect on our results of operations.

SWITCHBOARD:

Switchboard has identified the policies below as critical to the understanding of Switchboard’s results of operations. Note that Switchboard’s preparation of its Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of Switchboard’s financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, investments, intangible assets, compensation expenses, third-party commissions, restructuring costs, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

Critical accounting polices are those policies that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. Switchboard believes its most critical accounting policies are as follows:

Switchboard Revenue Recognition

Switchboard generates its revenue primarily from merchant advertisement placements promoted in the Switchboard-powered directories of our licensees, as well as those placed in our own online yellow pages directory. Generally, Switchboard recognizes revenue as services are provided, so long as no significant obligations remain and collection of the resulting receivable is probable. Switchboard believes that it is able to make reliable judgments regarding the creditworthiness of its customers based upon historical and current information available to it. Switchboard’s payment experience with its customers may not be consistent with past experience. In addition, the financial condition of these customers may decline in future periods, the result of

which could be its failure to collect invoiced amounts. Some of these amounts could be material, resulting in an increase in Switchboard’s provision for bad debts.

Switchboard earns revenue from AOL through the provision of platform licensing services and engineering and other services to AOL. Switchboard considers the delivery of platform licensing services to be a separate earnings process from engineering and other services and recognize revenue from engineering and other services in the period during which these services are delivered. Beginning in October 2003, Switchboard receives an annual license fee from AOL. Switchboard bifurcates this annual fee between a platform licensing fee of $2.4 million and an engineering services fee of $2.4 million. Switchboard recognizes these platform licensing fees and engineering services fees as revenue as they are earned. Bifurcating the annual fee between engineering services and platform licensing required Switchboard to make judgments with respect to the value attributable to each unit. Switchboard valued the amount attributable to engineering services using its standard hourly rates for providing such engineering services. Switchboard attributed the residual value of the annual license fee to platform licensing fees. Because Switchboard bifurcated the annual fee, Switchboard anticipates that during the term of our current agreement with AOL revenue from platform licensing fees under the agreement will be $0.6 million per quarter and revenue from engineering services under the agreement will be between $0.4 million and $0.8 million per quarter depending upon the amount of engineering services delivered to AOL each quarter. Therefore, Switchboard expects total quarterly revenue from the agreement will vary between $1.0 million and $1.4 million per quarter. Had Switchboard determined that it was unable to bifurcate the annual license fee between platform licensing and engineering services, all of the revenue Switchboard derived from the license fee would have varied in future quarters based upon their delivery of engineering services to AOL, varying between $0.8 million and $1.6 million per quarter.

Switchboard Concentration of Credit Risk

Switchboard invests its cash and cash equivalents primarily in deposits, money market funds and investment grade securities with financial institutions. Switchboard has not experienced any material realized losses to date on its invested cash. A potential exposure is a concentration of credit risk in accounts receivable. Switchboard maintains reserves for credit losses and, to date, such losses have been within our expectations. These expectations are based on historical experience, analysis of information currently available to it with respect to its customer’s financial position, as well as various other factors. While Switchboard believes it can make reliable estimates of these matters, it is possible that these estimates may change in the near future due, for example, to changes in market conditions, other economic factors or issues specific to individual customers. A change in estimates could negatively affect its results of operations.

Switchboard Impairment of Long Lived Assets

Switchboard evaluates the recoverability of its long-lived assets, including that attributable to its AOL arrangement, annually, or more frequently if events or changes in circumstances, such as a decline in sales, earnings or cash flows or material adverse changes in the business climate, indicate the carrying value of an asset might be impaired.

Should an indicator of impairment exist, Switchboard performs a recoverability assessment based on an undiscounted expected cash flow analysis utilizing management’s best estimate of the future cash flows expected to result from the use of the asset. Switchboard’s assumptions related to estimates of future cash flows are based on historical results of cash flows adjusted for management projections for future periods taking into account all available evidence at the date of review. Switchboard continually applies its best judgment when applying the impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairment, and the fair value of an impaired long-lived asset group. Switchboard includes the future issuance of stock in its cash flow analysis, as they did in their evaluation of the asset attributable to Switchboard’s AOL arrangement, because it represents an economic resource that Switchboard is contractually required to give to enjoy the benefits of a long-lived asset. The dynamic economic environment in which Switchboard operates and the resulting assumptions used to estimate future cash flows impact the outcome of all impairment tests.

If the asset being evaluated for impairment is a contractually based asset, as is the case in the asset attributable to Switchboard’s AOL arrangement, Switchboard utilizes the contractual terms in existence at the time of the impairment analysis to provide the framework for estimating the future expected cash flows. Accordingly, any modifications made to the long-lived asset’s underlying contract terms that occur subsequent to the original filing of its financial statements are not considered in its impairment analysis.

If the sum of these expected future cash flows is less than the carrying amount of the asset, the asset is considered impaired and the impairment loss is calculated. The impairment loss is determined as the difference between the asset’s estimated fair value and its carrying value. The fair value is determined by applying a discount rate to the expected future cash flows unless there is an observable market for such asset. The discount rate utilized in the analysis is commensurate with the risks involved.

Considerable management judgment is necessary to estimate future cash flows and appropriate assumptions; and accordingly, actual results could vary significantly from such estimates. The use of different assumptions and judgments could result in a determination that an asset is not impaired. In that case, an impairment charge would not be recorded in Switchboard’s results of operations during the relevant period and future results of operations would continue to be reduced as a result of amortization of the long lived asset.

Switchboard Accounting For Stock Based Compensation

Switchboard accounts for stock-based compensation for employees under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and elects the disclosure-only alternative under SFAS No. 123, “Accounting for Stock-Based Compensation” and provides the enhanced disclosures as required by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123.” SFAS 148 provides alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Had Switchboard chosen to voluntarily change to a fair value based method of accounting for stock-based employee compensation, Switchboard would have recorded additional expense in its results of operations of $1.3 million in 2003, $1.1 million in 2002 and $5.5 million in 2001.

The Financial Accounting Standards Board is currently considering a proposal that would require companies to change to a fair value based method of accounting for stock-based employee compensation. If the FASB requires such a change in accounting for stock-based employee compensation, Switchboard may be required to record the expense associated with the fair value of stock-based employee compensation in its results of operations in future periods.

Switchboard is required in the preparation of the disclosures required under SFAS 148 to make estimates when ascribing a value to stock options granted during the year. These estimates include, but are not limited to, an estimate of the average time option grants will be outstanding before they are ultimately exercised and converted into common stock and an estimate of the future volatility in the market value of Switchboard’s common stock over that period in which the option grants are outstanding. These estimates are integral to the valuing of these option grants. Any changes in these estimates may have a material effect on the value we ascribe to these option grants. This would in turn affect the amortization used in the disclosures Switchboard makes under SFAS 148, which could be material. Further, the rules governing accounting for option grants continue to evolve. Should Switchboard be required in future periods to include amortization of stock options, such amortization would have a material adverse effect on its results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003.

In December 2003, the FASB issued FIN No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows:

Special purpose entities (“SPEs”) created prior to February 1, 2003. We must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003.

Non-SPEs created prior to February 1, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

All entities, regardless of whether a SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

The adoption of the provisions applicable to SPEs and all other variable interests obtained after January 31, 2003 did not have a material impact our financial statements. We are currently evaluating the impact of adopting FIN 46-R applicable to Non-SPEs created prior to February 1, 2003 but do not expect a material impact.

FACTORS AFFECTING FUTURE RESULTS

Certain of the information contained in this Annual Report on Form 10-K, including, without limitation, information with respect to our plans and strategy for our business, statements relating to the sufficiency of cash and cash equivalent balances, anticipated expenditures, the anticipated effects of our cost reduction measures including the discontinuation of our remaining operations in Europe, and our sales and marketing and product development efforts, consists of forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “expects,” “anticipates,” “plans,” and similar expressions are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include the following factors:

Factors Relating To Our Proposed Asset Sale

If the Asset Sale is not completed as expected, our business could be materially disrupted.

If we are unable to close the proposed sale of our services business to Unisys (the “Asset Sale”), including as a result of our failure to obtain the approval of our stockholders or termination of the Asset Purchase Agreement between us and Unisys (the “Purchase Agreement”) by Unisys in the event the closing of the Asset Sale does not occur by the second quarter of 2004, or failure to satisfy any other closing condition, our services business could be materially disrupted. This disruption could be caused by confusion among our customers, industry partners and employees as to our future plans with respect to our services business. The public announcement of the Asset Sale and any subsequent failure to consummate the Asset Sale could have a material adverse effect on our sales and operating results and our ability to attract and retain customers, industry partners and key personnel. In addition, we will have to pay for our costs related to the Asset Sale, such as legal, accounting and financial advisory fees, even if the Asset Sale is not completed.

Because our stockholders will not receive stock of Unisys in the Asset Sale, our stockholders will not participate in the potential future growth of our services business.

The purchase price in the Asset Sale consists entirely of cash. As a result, our stockholders will not participate in the expected synergies between our services business and Unisys. Our stockholders will lose the opportunity to capitalize on the potential future growth of our services business and on the potential future success and profits.

The termination fee, expense reimbursement and restrictions on solicitation contained in the Purchase Agreement and the voting agreements may discourage other potential purchasers from trying to acquire us or our services business.

The Purchase Agreement obligates us to pay Unisys a termination fee of up to $800,000 and reimburse up to $200,000 of Unisys’ expenses under certain circumstances, including where our board of directors withdraws it recommendation in favor of the Asset Sale or where we terminate the Purchase Agreement to pursue a superior offer. These obligations would make it more costly for another potential purchaser to acquire us or our services business. The Purchase Agreement also generally prohibits us from soliciting, initiating, encouraging or facilitating any proposals that may lead to a proposal or offer for a merger or other business combination with any person other than Unisys. In addition, stockholders owning approximately 15.2% of our outstanding common stock, including our executive officers, directors and an affiliate of one of our directors, have signed voting agreements pursuant to which they have agreed to vote their shares in favor of the Asset Sale. These agreements could discourage other companies from trying to acquire us or our services business, even though those other companies might be willing to offer greater value than Unisys has offered in the Purchase Agreement.

Our stockholders will not be entitled to receive an immediate cash payment from Unisys in the acquisition.

The sale of our services business to Unisys is structured as an Asset Sale, meaning that we will sell the assets to Unisys in exchange for a cash payment to us rather than directly to our stockholders. Any cash that we receive from Unisys will be subject to claims of our creditors, and any distribution of this cash by us to our stockholders could be delayed and will be subject to the other risks and uncertainties associated with a liquidation, as described below under “Factors Relating to our Proposed Plan of Liquidation.” Also, unless the stockholders approve our plan of liquidation and dissolution (“the Plan of Liquidation”), we do not currently anticipate that we will distribute to our stockholders any cash proceeds from the Asset Sale.

Our directors and executive officers may have interests that are different from, or in addition to, those of our stockholders generally.

Our directors and executive officers have interests in the Asset Sale and Plan of Liquidation that are in addition to, or different from, their interests as stockholders. In connection with the Asset Sale and Plan of Liquidation, or upon termination of employment following the Asset Sale or approval of the Plan of Liquidation, our officers will be entitled to receive option vesting, severance benefits, loan forgiveness and other payments. In addition, following our dissolution, our directors and executive officers may receive liquidating distributions in respect of their options and will be entitled to continuing indemnification and liability insurance.

Factors Relating to Switchboard’s Announced Merger with Infospace

If Switchboard’s announced acquisition by InfoSpace is not completed, Switchboard’s business, reputation and stock price may suffer.

On March 26, 2004 Switchboard announced a definitive agreement to be acquired by InfoSpace. The agreement contains customary conditions to closing, including the absence of material adverse changes to Switchboard’s business and the receipt of Switchboard and ePresence, Inc. shareholder, as well as regulatory, approvals. If the transaction is not consummated as a result of a failure of one of these conditions to be met,

Switchboard’s customers, prospective customers and investors in general may view this failure as a poor reflection on Switchboard’s business or prospects. As a result, if the transaction is not consummated as anticipated, Switchboard may experience adverse results in Switchboard’s business and the market price for Switchboard’s common stock may fall. Switchboard intends to file a proxy statement in connection with the proposed acquisition of Switchboard by InfoSpace. Investors and security holders are urged to read these filings when they become available because they will contain important information and additional risk factors in connection with the proposed acquisition.

Factors Relating to our Proposed Plan of Liquidation

Our future plans would be uncertain if our stockholders failed to approve the Plan of Liquidation and our dissolution.

The Plan of Liquidation and our dissolution are dependent upon approval by our stockholders holding at least two-thirds of our outstanding shares. If our stockholders fail to approve the Plan of Liquidation and our dissolution, we may be required to either continue to operate our business or otherwise sell our business, assets or company. However, if the stockholders approve the Asset Sale but not the Plan of Liquidation and our dissolution, we will not have any business and will consider other alternatives, such as using our available cash to acquire other companies or businesses. Pursuant to the terms of the Asset Sale, we would generally be prohibited from competing with the business, so any acquisition would require us to enter a new business in which we may have little or no experience and, accordingly, which may be highly speculative.

Our anticipated timing of the liquidation and dissolution may not be achieved.

Immediately after our proposed special meeting of stockholders, if our stockholders approve the Plan of Liquidation and our dissolution, we intend to file articles of dissolution with the Secretary of State of the Commonwealth of Massachusetts and sell our remaining assets. Although we anticipate that we will make an initial distribution to stockholders within approximately 30 days following the special meeting, there are a number of factors that could delay our anticipated timetable, including the following:

•

lawsuits or other claims asserted against us;

•

legal regulatory or administrative delays; and

•

delays in settling our remaining obligations.

We cannot determine with certainty the amount of the distributions to stockholders.

We cannot determine at this time the amount of distributions to our stockholders pursuant to the Plan of Liquidation. This determination depends on a variety of factors, including, but not limited to, the consummation of the Asset Sale, the sale of Switchboard shares, the amount required to settle known and unknown debts and liabilities, and other contingent liabilities, the net proceeds, if any, from the sale of our remaining assets, and other factors. Examples of uncertainties that could reduce the value of or eliminate distributions to our stockholders include unanticipated costs relating to:

•

the defense, satisfaction or settlement of lawsuits or other claims that may be made or threatened against us in the future; and

•

delays in our liquidation and dissolution, including due to our inability to settle claims.

As a result, we cannot determine with certainty the amount of distributions to our stockholders.

We may not be able to settle all of our obligations to creditors.

We have current and future obligations to creditors. Our estimated distribution to stockholders takes into account all of our known obligations and our best estimate of the amount reasonably required to satisfy such

obligations. As part of the wind-down process, we will attempt to settle those obligations with our creditors. We cannot provide assurance that we will be able to settle all of these obligations or that they can be settled for the amount we have estimated for purposes of calculating the likely distribution to stockholders. If we are unable to reach an agreement with a creditor relating to an obligation, that creditor may bring a lawsuit against us. Amounts required to settle obligations or defend lawsuits in excess of the amounts estimated by us will reduce the amount of remaining capital available for distribution to stockholders.

Our board of directors may abandon or delay implementation of the Plan of Liquidation and our dissolution even if approved by our stockholders.

Even if the Plan of Liquidation and our dissolution are approved and adopted by our stockholders, our board of directors has reserved the right, in its discretion, to abandon or delay implementation of the Plan of Liquidation and our dissolution, in order, for example, to permit us to pursue new strategic opportunities.

Our stockholders may be liable to our creditors for an amount up to the amount distributed by us if our reserves for payments to creditors are inadequate.

If our stockholders approve the Plan of Liquidation and our dissolution and our board of directors determines to proceed with our liquidation and dissolution, the articles of dissolution will be filed with the Commonwealth of Massachusetts dissolving ePresence. Pursuant to Massachusetts law, we will continue to exist for three years after the dissolution becomes effective for the purpose of prosecuting and defending suits against us and enabling us to close our business, to dispose of our property, to discharge our liabilities and to distribute to our stockholders any remaining assets. Under applicable Massachusetts law, stockholders could be held liable for payment to our creditors up to the amount distributed to such stockholder in the liquidation. Accordingly, in such event, a stockholder could be required to return all distributions previously made to such stockholder pursuant to the Plan of Liquidation and could receive nothing from us under the Plan of Liquidation. Moreover, in the event a stockholder has paid taxes on amounts previously received by the stockholder, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. We cannot assure you that the contingency reserve established by us will be adequate to cover all expenses and liabilities.

Stockholders may not be able to recognize a loss for federal income tax purposes until they receive a final distribution from us, which is likely to be three years after our dissolution and could be longer.

As a result of our liquidation, for federal income tax purposes stockholders will recognize gain or loss equal to the difference between (1) the sum of the amount of cash distributed to them and the aggregate fair market value of any property distributed to them, and (2) their tax basis for their shares of our capital stock. A stockholder’s tax basis in our shares will depend upon various factors, including the stockholder’s cost and the amount and nature of any distributions received with respect thereto. Any loss generally will be recognized only when the final distribution from us has been received, which is likely to be more than three years after our dissolution.

We may be the potential target of a reverse acquisition or other acquisition.

Until we dissolve, we will continue to exist as a public, non-operating shell company. Public companies that exist as non-operating shell entities have from time to time been the target of “reverse” acquisitions, meaning acquisitions of public companies by private companies in order to bypass the costly and time-intensive registration process to become publicly traded companies. In addition, we could become an acquisition target, through a hostile tender offer or other means, as a result of our cash holdings or for other reasons. If we become the target of a successful acquisition, the new board of directors could potentially decide to either delay or completely abandon the liquidation and dissolution, and our stockholders may not receive any proceeds that would have otherwise been distributed in connection with the liquidation and may receive less than they would have received in the liquidation.

Our directors and executive officers may have interests that are different from, or in addition to, those of our stockholders generally.

Our directors and executive officers have interests in the Plan of Liquidation and the Asset Sale that are in addition to, or different from, their interests as stockholders. In connection with the Asset Sale and Plan of Liquidation, or upon termination of employment following the Asset Sale or approval of the Plan of Liquidation, our executive officers will be entitled to receive option vesting, severance benefits, loan forgiveness and other payments. In addition, following our dissolution our directors and executive officers may receive liquidating distributions in respect of their options and will be entitled to continuing indemnification and liability insurance.

Risks and Factors Relating to the Continued Operation of our Business

The continuing broad economic slowdown and global political uncertainty has affected the demand for IT services, lengthened the sales cycles and caused decreased technology spending for many of our customers and potential customers. If companies continue to cancel or delay their business and technology consulting initiatives because of the current economic and political climate, or for other reasons, our business, financial condition and results of operations could be materially adversely affected.

During 2002 we restructured our operations through workforce reductions and office closures. Such restructurings could have an adverse effect on our business, including on our ability to attract and retain customers and employees, and there can be no assurance that we will achieve the anticipated financial benefits of these restructurings. In addition, there can be no assurance that our workforce reductions will not have a material adverse effect on our business and operating results in the future.

The future success of the continued operation of our business will depend in part upon our ability to continue to grow our services business, enter into new strategic alliances, acquire additional services customers and adapt to changing technologies and customer requirements. Any failure to do so could have a material adverse effect on us. We have a limited operating history as a services company. In addition, the market for our consulting services and the technologies used in our solutions have been changing rapidly and we expect this level of change to continue. If we cannot keep pace with these changes in our marketplace, our business, financial condition and results of operations will suffer. There can be no assurance we will be successful in our strategic focus on services, including SIM services.

We sell our services principally through a direct sales force to customers in a broad range of industries. We do not require collateral or other security to support customer receivables. Conditions affecting any of our clients could cause them to become unable or unwilling to pay us in a timely manner, or at all, for services we have already performed. Our financial results and condition could be adversely affected by credit losses.

We have a number of partnerships and alliances with software vendors under which we provide services around such vendors’ products. Any failure of these alliances to generate the anticipated level of sales, the loss of one or more of these alliances, or the failure to enter into additional strategic alliances, could have a material adverse effect on us.

We are dependent upon the continued services of our key management and technical personnel. In addition, as a services company, our business is particularly dependent on our employees. Competition for qualified personnel is strong, and there can be no assurance we will be able to attract and retain qualified management and other employees.

We were not profitable during 2003, and there can be no assurance we will return to profitability in any future period. Continued losses could have a material adverse effect on our liquidity and capital resources.

Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our expenses, such as personnel and rent, are and will continue to be fixed in the short-term. We may not be able to

quickly reduce spending if our revenues are lower than we had projected. As a result, an unanticipated decrease in the number, or an unanticipated slowdown in the scheduling, of our projects may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations for that quarter. If we do not achieve our expected revenues, our operating results will be below our expectations and the expectations of investors and market analysts, which could cause the price of our common stock to decline. Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future, making it difficult to predict future performance. These variations result from a number of factors, many of which are outside of our control. Because of this difficulty in predicting future performance, our operating results will likely fall below the expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our common stock.

The market for our services is highly fragmented and characterized by continuing technological developments, evolving and competing industry standards, and changing customer requirements. We expect competition to persist and intensify in the future. Some of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies can also leverage extensive customer bases, have broad customer relationships and have broad industry alliances, including relationships with certain of our current and potential customers. In addition, certain competitors may adopt aggressive pricing policies or may introduce new services. Competitive pressures may make it difficult for us to acquire and retain customers and could require us to reduce the price of our services. We cannot be certain that we will be able to compete successfully with existing or new competitors. Our failure to maintain and enhance our competitive position would limit our ability to retain and increase our market share, resulting in serious harm to our business and operating results.

The future success of our services business depends on the increased acceptance and use of advanced technologies as a means for conducting commerce and operations. If use of these advanced technologies does not continue to grow, or grows more slowly than expected, our revenue growth could slow or decline and our business, financial condition and results of operations could be materially adversely affected. Businesses may delay adoption of advanced technologies for a number of reasons, including inability to implement and sustain profitable business models using advanced technologies; inadequate network infrastructure or bandwidth; delays in the development or adoption of new technical standards and protocols required to handle increased levels of usage; delays in the development of security and authentication technology necessary to effect secure transmission of confidential information; and failure of companies to meet their customers’ expectations in delivering goods and services using advanced technologies.

Our services rely upon third-party technologies. Our business could be harmed if providers of software and technology utilized in connection with our services ceased to deliver and support reliable products, enhance their current products in a timely fashion or respond to emerging industry standards. In addition, if we or our customers cannot maintain licenses to key third-party software, provision of our services could be delayed until equivalent software could be licensed and integrated into our services, or we might be forced to limit our service offerings. Either alternative could materially adversely affect our business, operating results and financial condition.

Some of our contracts can be canceled by the customer with limited advance notice and without significant penalty. Termination by any customer of a contract for our services could result in a loss of expected revenues and additional expenses for staff which were allocated to that customer’s project. We could be required to maintain underutilized employees who were assigned to the terminated contract. The unexpected cancellation or significant reduction in the scope of any of our large projects could have a material adverse effect on our business, financial condition and results of operations.

A significant portion of our projects are based on fixed-price, fixed-timeframe contracts, rather than contracts in which payment to us is determined on a time and materials basis. Our failure to accurately estimate the resources required for a project, or our failure to complete our contractual obligations in a manner consistent

with the project plan upon which our fixed-price, fixed-timeframe contract was based, could adversely affect our overall profitability and could have a material adverse effect on our business, financial condition and results of operations. We have been required to commit unanticipated additional resources to complete projects in the past, which has resulted in losses on those contracts. We will likely experience similar situations in the future and the consequences could be more severe than in the past, due to the increased size and complexity of our engagements. In addition, we may fix the price for some projects at an early stage of the process, which could result in a fixed price that turns out to be too low and, therefore, would adversely affect our business, financial condition and results of operations.

We own 9,802,421 shares of Switchboard’s common stock, which is traded on the NASDAQ National Market. The trading price of Switchboard’s common stock is likely to be volatile and may be influenced by many factors, including, without limitation, variations in financial results, changes in earnings estimates by industry research analysts, the failure or success of branding and strategic initiatives and investors’ perceptions. Volatility in the trading price of Switchboard’s common stock could have a material adverse effect on our financial condition. In addition, due to our level of ownership of Switchboard, the trading price of our common stock is likely to be influenced by the trading price of Switchboard’s common stock. If Switchboard’s trading price declines, the trading price of our common stock will likely decline as well.

Switchboard’s results of operations are consolidated as part of our results of operations. Switchboard, which has a history of incurring net losses prior to the quarter ended March 31, 2003, may experience losses in future periods. In addition, Switchboard’s quarterly results of operations have fluctuated significantly in the past and are likely to fluctuate significantly from quarter to quarter in the future. Factors that may cause Switchboard’s results of operations to fluctuate include: the success of Switchboard’s relationship with AOL; the addition or loss of relationships with third parties that are Switchboard’s source of new merchants for its local merchant network or that license Switchboard’s services for use on their own web sites; Switchboard’s ability to attract and retain consumers, local merchants and national advertisers to its web site; the amount and timing of expenditures for expansion of Switchboard’s operations, including the hiring of new employees, capital expenditures and related costs; the amount of Switchboard’s expenses, which are largely fixed in the short-term and are partially based on expectations regarding future revenue; Cable & Wireless’ recent announcement that it intends to exit its U.S. operations; Switchboard’s reliance on a small number of customers for a large portion of its revenues; intense competition; undetected software errors; risks associated with the conduct of business on the Internet; costs and risks associated with any acquisition; Switchboard’s ability to attract and retain the services of key executives and other highly skilled managerial and technical personnel; and other factors that may be announced by Switchboard from time to time.

William P. Ferry, our Chairman of the Board, President and Chief Executive Officer, is Switchboard’s Chairman of the Board, and Richard M. Spaulding, our Senior Vice President and Chief Financial Officer, and Robert M. Wadsworth, one of our directors, are directors of Switchboard. Serving as a director of Switchboard and as either a director or an officer of ePresence could create, or appear to create, potential conflicts of interest when those directors and officers are faced with decisions that could have different implications for us than for Switchboard. Such conflicts, or potential conflicts, of interest could hinder or delay our management’s ability to make timely decisions regarding significant matters relating to our business.

Because of the foregoing factors and the other factors we have disclosed from time to time, we believe that period-to-period comparisons of our financial results are not necessarily meaningful and should not rely upon these comparisons as indicators of our future performance. We expect that our results of operations may fluctuate from period-to-period in the future.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements



Report of Independent Auditors		29

Consolidated Balance Sheets as of December 31, 2003 and 2002		30

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001		31

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001		32

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001		33

Notes Consolidated Financial Statements		34

REPORT OF INDEPENDENT AUDITORS

To The Board of Directors and Stockholders of ePresence, Inc.:

We have audited the accompanying consolidated balance sheets of ePresence, Inc. as of December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ePresence, Inc. at December 31, 2003 and 2002 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that ePresence, Inc. will continue as a going concern. As more fully described in Note 1, the Company’s board of directors has approved a plan of liquidation, which, if approved by ePresence’s shareholders, will result in the cessation of all operations and activities of ePresence, Inc., other than the winding-up of its affairs. These conditions raise substantial doubt about whether the Company will continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

As discussed in Notes 2 and 6 to the consolidated financial statements, in 2001 the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and in 2002 the Company changed its method of accounting for goodwill.

/s/ Ernst & Young LLP

Boston, Massachusetts

March 3, 2004

except for Note 1, Note 3 and Note 26, as to

which the date is

March 26, 2004

ePRESENCE, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002

(in thousands, except share and par amounts)


	December 31,
	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	76,446		$	73,195
Restricted cash		36			1,640
Marketable securities		13,510			16,533
Accounts receivable, less allowances of $635 and $1,330, respectively		3,804			4,872
Other current assets		1,981			1,875

Total current assets		95,777			98,115
Marketable securities		1,960			13,902
Property and equipment, net		1,663			3,271
Other assets		1,379			1,131

TOTAL ASSETS	$	100,779		$	116,419


LIABILITIES
Current liabilities:
Accounts payable	$	1,770		$	1,927
Accrued expenses		6,261			8,522
Other current liabilities		421			448
Deferred revenue		1,395			1,608
Current portion of long-term debt		—			2,699

Total current liabilities		9,847			15,204

Long-term debt, net of current portion		—			1,124

Minority interests in Switchboard		27,540			24,522

Commitments and contingencies (Note 12)

SHAREHOLDERS’ EQUITY
Convertible preferred stock, $.01 par value; authorized—1,000,000 shares; none issued		—			—
Common stock, $.01 par value; authorized—100,000,000 shares; issued 26,465,836 and 26,332,027 shares, respectively		265			263
Additional paid-in capital		173,610			172,014
Unearned compensation		(32	)		(592	)
Accumulated deficit		(74,517	)		(60,420	)
Accumulated other comprehensive income		45			283
Treasury stock at cost; 3,677,800 shares		(35,979	)		(35,979	)

Total shareholders’ equity		63,392			75,569

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	100,779		$	116,419

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

ePRESENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2003, 2002 and 2001

(in thousands, except share and per share amounts)


	Year Ended December 31,
	2003			2002			2001
Net revenues:
Services	$	16,547		$	32,077		$	51,711
Switchboard		15,192			11,747			9,278

Total revenues		31,739			43,824			60,989

Cost of revenues:
Services		11,718			21,649			35,777
Switchboard		2,925			3,744			3,518

Total cost of revenues		14,643			25,393			39,295

Gross profit		17,096			18,431			21,694

Operating expenses:
Sales and marketing		9,299			15,012			42,312
Product development		4,264			5,446			6,702
General and administrative		11,992			15,135			19,192
Amortization of goodwill, intangibles and other assets		—			—			3,387
Termination of vendor relationship		6,500			—			—
Impairment of goodwill		—			14,779			12,364
Restructuring and special charges		(35	)		4,838			21,277
Loss on Viacom transaction		—			—			22,203

Total operating expenses		32,020			55,210			127,437

Loss from operations		(14,924	)		(36,779	)		(105,743	)

Other income/(expense):
Interest income		1,402			3,776			6,513
Minority interest in (income)/losses of Switchboard		(1,006	)		1,875			35,048
Interest expense		—			(164	)		(90	)
Gain on sale of Openwave, net		—			—			33,378
Other income/(expenses), net		121			(321	)		(1,857	)

Total other income		517			5,166			72,992

Net loss from operations before income taxes and cumulative effect of accounting change		(14,407	)		(31,613	)		(32,751	)
(Benefit) from/provision for income taxes		(310	)		95			11,025

Net loss before cumulative effect of accounting change		(14,097	)		(31,708	)		(43,776	)
Cumulative effect of accounting change		—			—			3,445

Net loss	$	(14,097	)	$	(31,708	)	$	(40,331	)

Basic and dilute net loss per share:
Net loss before cumulative effect of accounting change	$	(0.63	)	$	(1.42	)	$	(1.91	)

Cumulative effect of accounting change, net of tax of $1,855	$	—		$	—		$	0.15

Net loss	$	(0.63	)	$	(1.42	)	$	(1.76	)

Basic and diluted weighted average number of common shares		22,330			22,306			22,976

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

ePRESENCE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2003, 2002 and 2001

(in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital			Unearned Compensation			Accumulated Earnings/ (Deficit)			Other Comprehensive Income			Treasury Stock					Total Shareholders’ Equity
	Shares	Par		Additional Paid-in Capital			Unearned Compensation			Accumulated Earnings/ (Deficit)			Other Comprehensive Income			Shares		Cost			Total Shareholders’ Equity
Balance, December 31, 2000	26,063,646	$	261	$	144,725		$	(2,743	)	$	11,619		$	24,547		(1,893,000	)	$	(28,730	)	$	149,679
Net loss											(40,331	)										(40,331	)
Foreign currency translation adjustment														(151	)							(151	)
Change in net unrealized loss on investments														(23,377	)							(23,377	)

Comprehensive loss																						(63,859	)
Common stock issued under stock and option plans	156,223		1		557																	558
Issuance of Common Stock as contingent consideration under the Redbank purchase agreement	96,170		1		576																	577
Repurchase of shares																(1,500,300	)		(6,140	)		(6,140	)
Unearned compensation					25			(25	)													—
Amortization on unearned compensation								1,448														1,448
Net change in subsidiary capital, net of minority interest					27,257			(334	)													26,923

Balance, December 31, 2001	26,316,039	$	263	$	173,140		$	(1,654	)	$	(28,712	)	$	1,019		(3,393,300	)	$	(34,870	)	$	109,186
Net loss											(31,708	)										(31,708	)
Foreign currency translation adjustment														274								274
Change in net unrealized loss on investments														(1,010	)							(1,010	)

Comprehensive loss																						(32,444	)
Common stock issued under stock and option plans	15,988				45																	45
Repurchase of shares																(284,500	)		(1,109	)		(1,109	)
Amortization on unearned compensation								906														906
Net change in subsidiary capital, net of minority interest					(1,171	)		156														(1,015	)

Balance, December 31, 2002	26,332,027	$	263	$	172,014		$	(592	)	$	(60,420	)	$	283		(3,677,800	)	$	(35,979	)	$	75,569
Net loss											(14,097	)										(14,097	)
Change in net unrealized loss on investments														(238	)							(238	)


Comprehensive loss																						(14,335	)
Common stock issued under stock and option plans	133,809		2		468																	470
Amortization on unearned compensation								414														414
Net change in subsidiary capital, net of minority interest			—		1,128			146														1,274

Balance, December 31, 2003	26,465,836	$	265	$	173,610		$	(32	)	$	(74,517	)	$	45		(3,677,800	)	$	(35,979	)	$	63,392

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

ePRESENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31, 2003, 2002 and 2001

(in thousands)


	Year Ended December 31,
	2003			2002			2001
Cash Flows from Operating Activities:
Net loss	$	(14,097	)	$	(31,708	)	$	(40,331	)
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:
Loss/(gain) on sale of investments		1			(414	)		(33,378	)
Cumulative effect of accounting change		—			—			(5,300	)
Other-than-temporary unrealized loss on available for sale investments		—			6			55
Depreciation and amortization		1,874			2,527			7,410
Minority interest		1,006			(1,875	)		(35,048	)
Loss on disposal of assets		21			16			1,407
Loss on sale of subsidiary		—			—			784
Restructuring and other charges, non-cash portion		(35	)		2,985			19,388
Impairment of goodwill and other assets		—			14,779			12,364
Amortization of unearned compensation		560			1,062			1,550
Amortization of loan forgiveness		537			537			129
Amortization of AOL assets		—			2,000			4,048
Non-cash advertising and promotion		—			—			9,680
Loss on Viacom transaction		—			—			22,203
Expenses resulting from issuance of common stock and warrants related to third party agreements		—			—			(110	)
Deferred income taxes		—			—			(682	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		1,074			6,359			6,689
Income tax receivable		—			1,228			(1,228	)
Net discontinued liabilities		—			4			(599	)
Other current assets		(34	)		3,485			(2,199	)
Other non-current assets		(248	)		952			61
Directory services agreement		—			(2,000	)		—
Accounts payable and accrued compensation and expenses		(2,856	)		(10,131	)		(2,354	)
Accrued costs for restructuring and other charges		(7	)		(922	)		1,410
Deferred revenue		(214	)		(3,387	)		314

Net cash used in operating activities		(12,418	)		(14,497	)		(33,737	)


Cash Flows from Investing Activities:
Capital expenditures		(287	)		(935	)		(4,810	)
Proceeds from sales of investment		—			—			39,266
Acquisitions		—			—			(2,144	)
Decrease/(increase) in restricted cash		1,604			(766	)		(874	)
Proceeds from marketable securities, net		14,727			57,142			257

Net cash provided by investing activities		16,044			55,441			31,695


Cash Flows from Financing Activities:
Sale of equity in subsidiary, net		2,345			316			260
Proceeds from receipts on note receivable for issuance of Switchboard common stock		724			—			—
Net (payments on)/proceeds from sales lease-back		(2,223	)		(1,799	)		875
Proceeds from issuance of note payable		—			2,747			—
Settlement of Envenue litigation		(1,700	)		—			—
Purchase of treasury stock		—			(2,364	)		(6,140	)
Proceeds from stock plan purchases, stock options and warrants		470			45			557

Net cash used in financing activities		(384	)		(1,055	)		(4,448	)

Effect of exchange rate changes on cash and cash equivalents		9			284			(214	)

Net increase/(decrease) in cash and cash equivalents		3,251			40,173			(6,704	)
Cash and cash equivalents at beginning of the year		73,195			33,022			39,726

Cash and cash equivalents at end of the year	$	76,446		$	73,195		$	33,022


Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest	$	74		$	165		$	90
Income taxes	$	13		$	152		$	2,059
Non-cash investing and financing activity:
Issuance of common stock related to Red bank acquisition	$	—		$	—		$	576
Repurchase and retirement of restricted stock and reduction of note receivable	$	725		$	—		$	—
Note receivable from officer for issuance of common stock	$	—		$	1,449		$	—
Asset and liability related to AOL Directory Agreement	$	—		$	12,000		$	—
Unrealized loss on investments	$	238		$	1,010		$	23,377

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

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS

ePresence, Inc., (“the Company” or “ePresence”), has two reportable segments: services and Switchboard. The Company’s reportable segments are managed separately as they are separately traded public companies and market and distribute distinct products and services. ePresence is a consulting and systems integration company delivering Security and Identity Management (“SIM”) solutions that help companies reduce cost, enhance security, improve service and increase revenues. Identity management promotes effective management of users and access to the right information across IT environments, creating context and common infrastructure across distributed constituencies, business processes and applications. ePresence’s primary service offerings blend the elements of security and identity management, which include enterprise directory and security services, meta-directory services, access and password management services, single sign-on services, electronic provisioning services, information technology platform services, and managed operational services. The Company’s Switchboard segment is organized as a subsidiary, Switchboard Incorporated (“Switchboard”). Switchboard is a provider of web-hosted directory technologies and customized yellow pages platforms to yellow pages publishers, newspaper publishers and Internet portals that offer online local directory advertising solutions to national retailers and brick and mortar merchants across a full range of Internet and wireless platforms. Switchboard offers a broad range of functions, content and services, including yellow and white pages, product searching, location-based searching and interactive maps and driving directions. At December 31, 2003, the Company owned 9,802,421 shares or an approximate 51% equity interest of Switchboard’s outstanding common stock.

On October 23, 2003 the Company announced that it had signed a definitive agreement to sell the assets of its services business to Unisys Corporation (NYSE:UIS) for approximately $11,500,000 in cash. These assets include ePresence’s customer relationships and industry partnerships, and a majority of the Company’s employees are expected to become employees of Unisys. The transaction is subject to the approval of ePresence stockholders and other closing conditions, and is expected to be completed by the second quarter of 2004. The Company also announced that its Board of Directors has approved a plan of liquidation of the Company. On March 26, 2004, the Company announced that Switchboard agreed to be acquired by InfoSpace, Inc., subject to stockholder approval. ePresence has filed a preliminary proxy statement, dated November 6, 2003 and amended on December 18, 2003 and January 14, 2004, regarding these matters and will file an amendment to the proxy statement to reflect the merger proposal.

In connection with ePresence’s plans to liquidate and dissolve, the Company has incurred approximately $6,500,000 as of December 31, 2003, related to the termination of a vendor relationship, approximately $886,000 for subsidiary dissolution costs, the settlement of certain customer arrangements, severance costs, legal, accounting, investment banking and other professional fees and expenses.

Upon sale of assets to Unisys, the sale of Switchboard shares and the liquidation and dissolution, the Company will cease all operations and activities other than the winding-up of its affairs. The accompanying financial statements have been prepared assuming that ePresence Inc. will continue as a going concern because liquidation is not deemed imminent as it is subject to shareholder approval. The proposed liquidation raises substantial doubt about whether the Company will continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty. Should the sale of assets to Unisys, the sale of Switchboard shares and the liquidation and dissolution not occur, management would seek other strategic alternatives relating to the operation and/or sale of the Company.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements comprise those of the Company and its wholly-owned and majority owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current method of presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Those instruments with original maturities between three and twelve months are considered to be short-term marketable securities, and investments with maturities of greater than one year are classified as long-term marketable securities. Cash equivalents and marketable securities are carried at market and consist primarily of U.S. government securities, corporate and municipal issues, and interest bearing deposits with major banks.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), the Company classifies all of its marketable debt and equity securities as available for sale securities. These securities are valued at their fair value. Unrealized holding gains and losses are reported as a net amount in accumulated other comprehensive income, a separate component of shareholders’ equity.

In 2003, 2002 and 2001, purchases of marketable securities were $ 28,832,000, $44,024,000 and $117,340,000 respectively. In 2003, 2002 and 2001, proceeds from sales and maturities of marketable securities, excluding sales of Openwave, were $43,559,000, $101,166,000 and $117,597,000 respectively.

In 2003, 2002 and 2001, the Company recorded realized losses on marketable securities of $4,000, $57,000 and $4,000, respectively. In 2003, 2002 and 2001, the Company recorded a realized gain on marketable securities, excluding sales of Openwave, of $47,000, $735,000 and $269,000, respectively.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated asset lives:


Computers and peripherals		3 years
Office equipment and software		3-5 years
Furniture and fixtures		5 years

Maintenance and repairs are charged to expense when incurred, while betterments are capitalized. Leasehold improvements are amortized over the lesser of the lease term or the life of the asset. When property is retired or

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

otherwise disposed of, the related cost and accumulated depreciation are removed from the respective amounts and any gain or loss is reflected in operations.

Revenue Recognition

ePresence recognizes services revenues pursuant to time and material contracts generally as services are provided. Services revenues pursuant to fixed-fee contracts are generally recognized as services are rendered using the proportionate performance method of accounting (based on the ratio of costs incurred to total estimated costs) with revisions to estimates reflected in the period in which changes become known. Service revenues include customer reimbursements for out-of-pocket expenses.

Switchboard generates its revenue primarily from merchant advertising placements promoted in the Switchboard-powered directories of its licensees, as well as in its directory website. Generally, revenue is recognized as services are provided, so long as no significant obligations remain and collection of the resulting receivable is probable. Switchboard believes that it is able to make reliable judgments regarding the creditworthiness of its customers based upon historical and current information available to Switchboard. There can be no assurances that Switchboard’s payment experience with its customers will be consistent with past experience or that the financial condition of these customers will not decline in future periods, the result of which could be the failure to collect invoiced amounts. Some of these amounts could be material, resulting in an increase in Switchboard’s provision for bad debts.

Switchboard licenses its directory technology to its licensees. Licensees can enter into a development and licensing arrangement with Switchboard whereby Switchboard creates and/or modifies a private labeled web-hosted directory. Switchboard recognizes revenue under these agreements when evidence of an arrangement exists, the related fee is fixed or determinable, and collection of the fee is reasonably assured, in accordance with Staff Accounting Bulletin No. 101 (“SAB”) and No. 104, “Revenue Recognition in Financial Statements” (“SAB Nos. 101 and 104”). Revenue received by Switchboard for such development and licensing arrangements is deferred until such time as the customer accepts the directory. Switchboard considers customer acceptance to occur at the time the directory is made accessible to the licensee for general use. After acceptance by the customer, revenue from such development and licensing agreements is recognized on a straight-line basis over the remaining life of the agreement. Once the web-hosted directory is operational, Switchboard may earn additional fees based on the number of merchants promoted within the directory. Per merchant license fees or additional engineering and other services fees are recognized as earned. Per merchant fees are considered earned in the period during which the merchant advertisement is displayed in Switchboard’s website and/or the website of Switchboard licensees. Additional engineering and other services fees are considered earned in the period during which the services were provided.

Switchboard’s most significant licensee is America Online, Inc. (“AOL”). Revenues recognized under Switchboard’s agreement with AOL are recognized in accordance with SAB Nos. 101 and 104. Prior to October 2003, Switchboard received a share of directory advertisement revenue earned by AOL from the sales of advertisements on the yellow pages directory it provides to AOL, less an estimate for amounts deemed uncollectable by AOL. Switchboard recorded as merchant licensing revenue the net amount received from AOL in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF No. 99-19”), as it is earned. Switchboard considers this merchant licensing revenue earned during the period that AOL displays the advertisements sold to its customers in its yellow page directory. Switchboard also earns revenue from AOL through the provision of engineering and other services to AOL. Switchboard considers the delivery of engineering and other services to be a separate earnings process and recognizes revenue from engineering and other services in the period during which these services are

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

delivered. Subsequent to October 2003, Switchboard receives an annual license fee. Switchboard bifurcates this amount between merchant and platform licensing fees and engineering services fees. Switchboard recognizes revenue from merchant and platform licensing fees as earned. Switchboard considers revenue from merchant and platform licensing earned as it provides AOL the yellow pages directory and displays AOL’s advertisers in the Switchboard.com yellow pages. In addition, included as an offset to revenue is consideration given to AOL, for which the benefits of such consideration are not separately identifiable from the revenue obtained from AOL.

Switchboard sells national and local advertisements in Switchboard.com through its direct sales force, as well as through third-parties. For these advertisements, Switchboard is generally paid a monthly fee based on the number of advertisements placed into www.switchboard.com. Switchboard recognizes this monthly fee as revenue as it is earned. Switchboard considers this fee earned during the period that they provide the advertising on www.switchboard.com.

Deferred revenue is principally comprised of billings relating to consulting engagements, advertising agreements and licensing fees received in advance of revenue recognition.

Cost of Revenue

ePresence’s cost of revenues consists primarily of direct costs (i.e. compensation) of consulting delivery personnel and third party product and labor costs. Direct costs associated with its delivery personnel are recorded as expenses are incurred. Third party costs associated with the delivery of ePresence services are recorded as a cost of revenue in the period during which the services are performed.

Switchboard’s cost of revenue consists primarily of expenses paid to third parties under data licensing and website creation and hosting agreements, search engine database inclusion expenses and employee compensation expense associated with the delivery of additional engineering, as well as other direct expenses incurred to maintain the operations of Switchboard’s website and the web-hosted platforms of its licensees. Expenses associated with data licensing are largely fixed in nature and are recorded as expense on a straight-line basis. Direct expenses incurred to maintain the operations of Switchboard’s website and those of its licensees are recorded as expense as incurred. Website creation and hosting expenses and search engine database inclusion expenses are variable based upon the number of merchants receiving website services and the amount of search engine database inclusion purchased. Switchboard recognizes these expenses as the website creation and hosting expense and search engine database inclusion expenses are incurred. Employee compensation expense associated with the delivery of additional engineering is recorded as a cost of revenue in the period during which the additional engineering was performed.

Foreign Currency Translation

Prior to January 1, 2002, the Company’s foreign subsidiaries generally used the local currency as the functional currency. Assets and liabilities were translated into U.S. dollars at the period ended exchange rate and income and expense amounts were translated using the average rate prevailing for the period. Adjustments resulting from translation were included in accumulated other comprehensive income.

As of January 1, 2002, the Company’s remaining foreign subsidiaries began using the U.S. dollar as the functional currency as the Company substantially liquidated its remaining foreign subsidiaries. As a result, the translation gains/losses in 2002 are included in net loss for 2002. Prior cumulative translation gains/losses within accumulated comprehensive income have been reversed and included in the net loss in 2002.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Minority Interest

Minority interest in Switchboard represents minority shareholders’ proportionate share of the equity in the Company’s subsidiary, Switchboard. At December 31, 2003, the Company owned approximately 51% of Switchboard’s outstanding common stock.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash equivalents, marketable securities, accounts receivable, accounts payable, accrued expenses and a note payable, approximate their fair values.

Stock-Based Compensation

The Company and Switchboard account for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations. Accordingly, no compensation expense is recorded for options issued to employees in fixed amounts and with fixed exercise prices at least equal to the fair market value of ePresence’s and Switchboard’s common stock, respectively, at the date of grant. ePresence has adopted the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) through disclosure only (Note 14). All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS 123.

At December 31, 2003, ePresence has four stock-based employee compensation plans, which are more fully described in Note 14. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25 and related interpretations. ePresence has issued restricted stock at a price determined by the Compensation Committee of the Board of Directors subject to the Company’s right to repurchase such stock in specified circumstances prior to the expiration of a restricted period within these plans. The following table illustrates the compensation expense related to these transactions:


	2003		2002		2001
	(in thousands)
1992 Stock Incentive Plan	$	—	$	724	$	1,197
2000 Non-Executive Stock Plan		414		182		252

Total compensation expense	$	414	$	906	$	1,449

In addition, Switchboard has three stock-based employee compensation plans as defined by SFAS 148. Switchboard accounts for those plans under the recognition and measurement principles of APB 25 and related interpretations. Because options vest over several years and additional option grants are expected to be made in future years, the below pro-forma effects are not necessarily indicative of the pro-forma effects on future years.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Had compensation cost for the Company’s and Switchboard’s stock-based compensation plans been recorded based on the fair value of awards at the grant dates as calculated in accordance with SFAS No. 123, the Company’s consolidated net loss and loss per share for the years ended December 31, 2003, 2002, and 2001 would have been increased/(decreased) to the pro forma amounts indicated below:


	2003			2002			2001
	(in thousands except per share amounts)
Net loss as reported	$	(14,097	)	$	(31,708	)	$	(40,331	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		489			987			1,491
Add: Adjustment for previously amortized expense associated with the unvested portion of options canceled in the period		391			2,020			1,288
Less: Total stock-based compensation expense determined under fair value based method for all awards		(4,626	)		(9,367	)		(12,053	)

Pro forma net loss	$	(17,843	)	$	(38,068	)	$	(49,605	)

Basic and diluted loss per share as reported	$	(0.63	)	$	(1.42	)	$	(1.76	)
Pro forma basic and diluted loss per share	$	(0.80	)	$	(1.71	)	$	(2.16	)

The effects of applying SFAS No. 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. Additional awards in future years are anticipated. SFAS No. 123 does not apply to awards granted prior to 1995.

The fair value of each of the Company’s option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001 as follows:


	2003			2002			2001
Risk-free interest rates		2.9	%		4.3	%		5.0	%
Expected dividend yield		0	%		0	%		0	%
Expected life		5 years			5 years			5 years
Expected volatility		55	%		101	%		80	%
Weighted average fair value of options granted	$	1.11		$	2.49		$	2.69
Weighted average remaining contractual life of options outstanding		6.52 years			7.25 years			7.97 years

The fair value of each of Switchboard’s option grants is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in each of the following periods:


	Year Ended December 31,
	2003		2002		2001
Dividend yield	0	%	0	%	0	%
Expected volatility	122	%	130	%	130	%
Risk free interest rate	2.9	%	3.9	%	4.3	%
Expected lives	4 years		4 years		4 years

Switchboard’s weighted average grant date fair values using the Black-Scholes option pricing model were $5.19, $3.28 and $3.99 during the years ended December 31, 2003, 2002 and 2001, respectively.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003.

Non-SPEs created prior to February 1, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.

Concentration of Credit Risk and Significant Customers

SFAS No. 105, “Disclosure of Information About Financial Instruments with Off Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk,” requires disclosure of any significant off balance sheet and credit risk concentrations. Financial instruments that subject the Company to the potential for credit risk consist primarily of trade accounts receivable. The Company sells its services principally through a direct sales force to customers in a broad range of industries. The Company performs ongoing credit evaluations of its customers’ financial condition but does not require collateral or other security to support customer receivables. The Company maintains reserves for credit losses, and to date, such losses have been within management’s expectations.

Historically, the Company has not experienced significant losses related to its accounts receivable. One customer accounted for 20% of revenues in 2003, one customer accounted for 17% of revenues in 2002 and two customers accounted for 22% of revenue in 2001. In 2001, the majority of the Company’s European revenue was concentrated in Germany and the United Kingdom. At December 31, 2003, two customers accounted for 22% of consolidated net accounts receivable. At December 31, 2002, two customers accounted for 23% of consolidated net accounts receivable. At December 31, 2001, two customers accounted for 42% of consolidated net accounts receivable. At December 31, 2003 and 2002, approximately 0% and 1% of consolidated net accounts receivable

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

represent accounts denominated in foreign currencies that are translated at year-end exchange rates. For the years ended December 31, 2003, 2002 and 2001, foreign sales accounted for 0%, 2% and 10% of total revenues, respectively.

The Company invests its cash and cash equivalents primarily in deposits and money market funds with two commercial banks. The Company has not experienced any losses to date on its invested cash.

Income Taxes

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. A deferred tax asset is established for the expected future benefit of net operating loss and credit carryforwards. A valuation reserve against net deferred tax assets is required if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Derivative Instruments and Hedging

In June 1998, FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Effective January 1, 2001, the Company adopted SFAS No. 133, as amended. SFAS No. 133 establishes the accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. All derivatives are required to be measured at fair value and recognized as either assets or liabilities in the financial statements. If derivatives do not meet the criteria for hedge accounting, any gain or loss resulting from changes in value must be recognized in earnings immediately.

As discussed in Note 17, on January 1, 2001 the Company was party to two separate hedging contracts related to its investment in Openwave. Since the Company did not designate these hedges, the fair market value of these hedges, $5,300,000 at January 1, 2001, was recorded as an asset and, accordingly, the Company recorded a cumulative effect in accounting change, net of taxes, of $3,445,000 (an earnings per share impact of $0.15). Upon liquidation of the Openwave investment these hedges were terminated and were offset against the gain from the sale of Openwave. These changes had no effect on the consolidated net income of the Company for the period ending December 31, 2001. Aside from these hedges, at January 1, 2001 and through December 31, 2003, the Company was not party to any other derivative instruments.

Upon liquidation of the Company’s Openwave position in January 2001, these hedges were terminated. The gain on sale of Openwave reported by the Company in its statement of operations includes the effect of writing off the previously recorded asset related to these hedges.

Comprehensive Income

The Company applies the provisions of SFAS No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company has disclosed comprehensive income/(loss) for all periods presented in the accompanying statements of shareholders’ equity.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Advertising Expense

Advertising costs are expensed as incurred and totaled $34,000 and $15,430,000 in the years ended December 31, 2002 and 2001, respectively. In 2001, the costs included $9,680,000 of non-cash advertising received from Viacom Inc. (formerly CBS Corporation) (Note 23).

NOTE 3.

PRO FORMA CONSOLIDATED STATEMENT OF NET ASSETS AVAILABLE IN LIQUIDATION (UNAUDITED)

In the event of stockholder approval of the plan of liquidation discussed in Note 1, the Company would be required to adopt a liquidation basis of accounting. Accordingly, the Company would no longer report a balance sheet but would instead report a consolidated statement of net assets available in liquidation, which would not include a stockholders’ equity section. In the consolidated statement of net assets available in liquidation, the Company’s assets would be valued at their estimated net realizable value and liabilities would include the estimated costs associated with carrying out the plan of liquidation. In addition, the Company would no longer report a consolidated statement of operations but instead would report a consolidated statement of loss and changes in net assets.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents a pro forma reconciliation of a statement of net assets available for liquidation assuming the plan of liquidation is approved and the sales of the services business assets and Switchboard common stock are consummated. The Company has estimated, as of December 31, 2003, the following potentially realizable values of its assets, estimated liabilities and estimated costs of liquidation after the Company ceases its operations, including the Company’s shares of Switchboard common stock. There can be no assurance, however, that the plan of liquidation and the sales of the services business assets and Switchboard common stock will be approved or that the Company will incur costs or be able to settle its liabilities or dispose of its assets within the indicated ranges, or at all.


	Historical			Pro forma adjustments(8)									Pro forma
	December 31, 2003			Switchboard (1)			Sale to Unisys(2)			Other Adjustments			December 31, 2003
	December 31, 2003			Switchboard (1)			Sale to Unisys(2)			Other Adjustments			December 31, 2003
	(Unaudited, in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	76,446		$	(47,265	)	$	11,500		$	—		$	40,681
Restricted cash equivalents		36			(36	)		—			—			—
Marketable Securities		13,510			(6,591	)		—			—			6,919
Accounts receivable, net		3,804			(1,503	)		(2,301	)		—			—
Prepaid expenses and other current assets		1,981			(863	)		(507	)		(516	)(3)		95
Investment in Switchboard (6)		—			12,966			—			61,694			74,660

Total current assets		95,777			(43,292	)		8,692			61,178			122,355

Property and equipment, net		1,663			(794	)		(164	)		(705	)(3)		—
Non-current investments		1,960			(1,960	)		—			—			—
Other assets		1,379			(511	)		—			(518	)(3)		350

Total assets	$	100,779		$	(46,557	)	$	8,528		$	59,955		$	122,705

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,770		$	(1,398	)	$	(147	)	$	—		$	225
Accrued expenses		6,261			(1,180	)		2,500			(7,581	)(4)		—
Other current liabilities		421			—			—			(421	)(4)		—
Reserve for estimated costs during liquidation		—			—			—			25,534	(5)		25,534
Deferred revenue		1,395			(603	)		(792	)		—			—

Total current liabilities		9,847			(3,181	)		1,561			17,532			25,759

MINORITY INTEREST		27,540			(27,540	)		—			—			—
STOCKHOLDERS’ EQUITY:
Common stock		265			(98	)		—			(167	)(7)		—
Additional paid-in capital		173,608			(85,025	)		—			(88,583	)(7)		—
Unearned Compensation		(32	)		32			—			—			—
Accumulated deficit		(74,515	)		56,340			6,967			34,970	(7)		—
Accumulated other comprehensive income		45			(51	)		—			6	(7)		—
Treasury Stock		(35,979	)		—			—			35,979	(7)		—

Total stockholders’ equity		63,392			(28,802	)		6,967			(17,795	)	$	—

Total liabilities and stockholders’ equity	$	100,779		$	(59,523	)	$	8,528		$	(263	)	$	25,759

Net assets available to common stockholders													$	96,946

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Notes to Pro Forma Consolidated Statement of Net Assets Available in Liquidation

(1)

These pro forma adjustments de-consolidate Switchboard, as Switchboard is being sold to InfoSpace, Inc.

(2)

These adjustments reflect the sale of the services business to Unisys for the estimated purchase price of $11.5 million, including a working capital adjustment equal to 90% of accounts receivable and work-in-process, less deferred revenue, supplier payables and a potential adjustment for timing of the close of sale.

(3)

Estimated proceeds from the return of security deposits and the sale and disposition of long-lived assets.

(4)

Adjustment to consolidate liquidation reserves and accruals.

(5)

Total reserves for estimated costs during liquidation include the settlement of accrued liabilities, including real estate lease obligations, employee compensation costs and a reserve for unknown contingencies totalling $12.7 million. Also includes estimated operating costs associated with the liquidation of the Company as follows:

(i)

Ongoing operating costs, including estimated costs related to dissolution transaction, payroll costs and other operating costs such as rent, legal fees, accounting fees, taxes, insurance and other operating costs through December 31, 2006 totalling $4.1 million,

(ii)

employee severance and related costs of $6.6 million, certain of which are based upon the amounts distributed to our stockholders and

(iii)

other costs, including cost of the director and officer six-year tail insurance policy, certain foreign entity dissolution costs and benefits plans termination costs of $1.1 million.

(6)

Value expected to be distributed to stockholders with respect to the sale of Switchboard shares to Infospace for $7.75 per Switchboard share net of estimated tax liability.

(7)

In accordance with a liquidation basis of accounting, the consolidated statement of net assets available in liquidation would not include a stockholders’ equity section.

(8)

The pro forma adjustments do not include any estimates for pending or threatened litigation or claims.

NOTE 4. MARKETABLE SECURITIES

Marketable securities consisted of the following at December 31, 2003 and 2002:


	2003				2002
Security Type	Aggregate Fair Value		Amortized Cost		Aggregate Fair Value		Amortized Cost
	(in thousands)
Maturing within one year:
Common Stock
U.S. Treasury Notes	$	7,577	$	7,537	$	5,138	$	5,066
Commercial Paper/Agencies		5,420		5,433		9,848		9,780
U.S. Corporate Debt Securities		513		506		1,547		1,540

	$	13,510	$	13,476	$	16,533	$	16,386

Maturing after one year through five years:
Commercial Paper/Agencies	$	—	$	—	$	7,775	$	7,579
U.S. Treasury Notes		—		—		2,037		2,017
U.S. Corporate Debt Securities		560		555		2,590		2,547
Municipal Obligations		1,400		1,400		1,500		1,500

	$	1,960	$	1,955	$	13,902	$	13,643

Totals	$	15,470	$	15,431	$	30,435	$	30,029

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unrealized gains/(losses) are included in shareholders’ equity and accumulated other comprehensive income, net of tax.

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at:


	December 31,
	2003			2002
	(in thousands)
Computer and peripherals	$	4,729		$	6,668
Office equipment and software		4,791			5,170
Furniture and fixture		450			1,163
Leasehold improvements		1,087			1,079

Total cost		11,057			14,080
Accumulated depreciation and amortization		(9,394	)		(10,809	)

Net property and equipment		1,663			3,271

Depreciation expense during 2003, 2002 and 2001 was $1,874,000, $2,490,000 and $3,120,000, respectively.

NOTE 6. GOODWILL, OTHER LONG LIVED ASSETS

In September 2001, due to the decline in business conditions, the Company initiated a cost savings program and realigned resources to focus on profit contribution and core opportunities. Based upon impairment analyses which indicated that the carrying amount of the goodwill and purchased intangible assets would not be fully recovered through estimated undiscounted future operating cash flows, a charge of $12,364,000 was recorded during the quarter ended September 30, 2001. The impairment of goodwill was measured as the amount by which the carrying amount exceeded the present value of the estimated discounted future cash flows attributable to such goodwill.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” which requires the Company to discontinue amortization of goodwill as of December 31, 2001. The Company adopted SFAS 142 during the first quarter of 2002 and ceased amortizing goodwill with a net book value of $14,780,000 as of the beginning of fiscal 2002. The Company completed an assessment of fair value of goodwill in the second quarter of 2002 and updated the assessment in the third quarter of 2002 due to the continued decline in economic conditions. Neither of these assessments indicated an impairment of goodwill. However, in the fourth quarter of 2002, the Company completed its yearly assessment of fair value of goodwill and based upon this impairment analysis, the results indicated that the carrying amount of the goodwill would not be fully recovered through estimated undiscounted future operating cash flows, an impairment charge of $14,779,000 was recorded during the year ended December 31, 2002. The impairment of goodwill was measured as the amount by which the carrying amount exceeded the present value of the estimated discounted future cash flows attributable to such goodwill.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents net loss as reported and net loss on a pro forma basis as if SFAS 142 had been adopted on January 1, 2001:


	Twelve months ended December 31, 2001
	(in thousands)
Net loss—as reported	$	(40,331	)
Amortization of goodwill		3,025

Net loss—as adjusted		(37,306	)

Basic and diluted loss per share—as reported	$	(1.76	)

Basic and diluted loss per share—as adjusted	$	(1.62	)

Pursuant to a distribution agreement Switchboard entered into with America Online, Inc. (“AOL”, the “Directory Agreement”), Switchboard issued shares of its common stock to AOL. The value of these shares of common stock had been recorded as an intangible asset, and had been amortized on a straight-line basis over the life of the Directory Agreement. As of December 31, 2001, Switchboard evaluated the net realizable value of all of its assets related to AOL and Envenue as a result of lower than anticipated revenues in accordance with Statement of Financial Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS 121”) and determined that both its assets related to AOL and Envenue had been impaired. As a result, Switchboard recorded a loss on impairment as a component of its special charge in 2001 (Notes 11 and 24).

On November 24, 2000, Switchboard acquired Envenue, a wireless provider of advanced product searching technologies designed to drive leads to traditional retailers. The transaction was accounted for as a purchase. The total purchase price included consideration of $2,000,000 in cash, which was to be paid on or before May 24, 2002, and $38,000 in recorded value of stock options to purchase 10,200 shares of Switchboard’s common stock issued to non-employees. Switchboard did not pay the $2,000,000 on or before May 24, 2002, as it was involved in a contractual dispute with the previous owners of Envenue. In June 2002, Switchboard placed $2,000,000 into an escrow account, which was to be held until the resolution of this dispute. In October 2002, Switchboard paid $410,000 out of the escrowed funds, representing the undisputed portion of the purchase price plus interest from the original maturity date to the former stockholders of Envenue. The remaining $1,604,000 of the purchase price, which was non-interest bearing, was classified separately in the accompanying financial statements as of December 31, 2002. Switchboard recorded $1,604,000 as restricted cash at December 31, 2002 related to the cash held in escrow. In June 2003, Switchboard paid the former owners of Envenue $1,700,000 to settle all claims related to the acquisition of Envenue. As a result, Switchboard no longer has funds in escrow related to the matter.

In December 2001, Switchboard exercised its rights under the acquisition agreement to substantially reduce the funding of its Envenue acquisition. Additionally, Switchboard evaluated the carrying value of its goodwill in Envenue, and determined it would not be fully recovered through estimated undiscounted future operating cash flows. As a result during the three months ending December 31, 2001, Switchboard recorded an impairment charge of $1,859,000 related to the Envenue goodwill. This impairment charge was recorded as a component of special charges within the consolidated statement of operations (See Note 11).

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, which was effective for the Company on January 1, 2002. SFAS No. 144 addresses accounting and

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

reporting for the impairment or disposal of long-lived assets, except goodwill, that are either held and used or disposed of through sale or other means. SFAS No. 144 did not have an impact on the Company’s financial position financial position, results of operations and cash flows.

NOTE 7. DEBT AND FINANCING AGREEMENTS

On November 7, 2002, the Company entered into a $10,000,000 revolving line of credit with Silicon Valley Bank (“SVB”) that provides for borrowings at SVB’s prime rate. This credit agreement had a one-year term and contained covenants relating to the maintenance of certain financial ratios. The Company had no borrowings under this facility outstanding at December 31, 2002 and did not renew the line in 2003.

In March 2001, Switchboard entered into a computer equipment sale-leaseback agreement with Fleet Capital Corporation (“FCC”) under which Switchboard was able to lease up to $3,000,000 of equipment. Under the agreement, Switchboard was to have leased computer equipment over a three-year period ending on June 28, 2004. At December 31, 2001, Switchboard had utilized approximately $1,101,000 of this lease facility. The agreement had an estimated effective annual percentage rate of approximately 7.90%. Under the terms of the agreement, Switchboard was required to maintain on deposit with Fleet a compensating balance, restricted as to use, in an amount equal to the principal outstanding under the lease. Switchboard had accounted for the transaction as a capital lease. In May 2002, Switchboard paid $794,000 to FCC to terminate its lease obligations with FCC through an early buy-out. The $794,000 was comprised of $764,000 in outstanding principal under the lease and $30,000 in expenses associated with the early termination. In exchange for the amount paid, Switchboard assumed all right and title to the assets leased under the facility. Additionally, Switchboard’s requirement to maintain a compensating balance with Fleet was eliminated.

In June 2002, Switchboard entered into a loan and security agreement (the “SVB Financing Agreement”) with Silicon Valley Bank (“SVB”), under which Switchboard was able to borrow up to $4,000,000 for the purchase of equipment. Amounts borrowed under the facility accrued interest at a rate equal to prime plus 0.25%, and were to have been repaid monthly over a 30-month period. Switchboard had utilized $2,700,000 of this facility through borrowings that occurred in June 2002 and September 2002. Switchboard recorded a note payable to SVB on its balance sheet totaling $2,200,000 for the equipment financed as of December 31, 2002, of which $1,100,000 was classified as a current liability. The SVB Financing Agreement also provided for a $1,000,000 revolving line of credit at an interest rate equal to prime. Switchboard did not borrow any amounts under the revolving line of credit. Switchboard’s ability to borrow additional amounts under the SVB Financing Agreement expired on May 30, 2003 after Switchboard chose not to renew the agreement. In May 2003, Switchboard paid SVB $1,800,000 in satisfaction of its outstanding borrowings under the loan facility.

NOTE 8. EMPLOYEE BENEFIT PLANS

The Company has a savings and profit sharing plan covering substantially all U.S. employees. The plan is qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended.

The Company matches an employee’s elective deferrals to the plan based upon a prescribed formula. Vesting of the Company’s matching contribution is over a four-year period and begins on the date of hire. The Company contributed $206,000, $307,000 and $480,000 in 2003, 2002 and 2001, respectively.

NOTE 9. DEFERRED OFFERING COSTS

On October 23, 2003, Switchboard filed a Registration Statement on Form S-1 in connection with a proposed underwritten offering of 8,815,171 shares of its common stock, plus an over-allotment option of

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1,322,250 shares. Of the shares proposed to be sold, including the over-allotment option, 10,037,421 shares are proposed to be sold by ePresence, Inc. and certain other selling shareholders, and 100,000 are proposed to be sold by Switchboard. The offering is being initiated by ePresence in order to facilitate an orderly disposition of its Switchboard holdings in conjunction with its announced plan of liquidation. At the completion of the offering, Switchboard anticipates that ePresence will continue to own 5.6% of Switchboard’s shares. If the over-allotment option is exercised and the additional 1,322,250 shares are sold, ePresence will no longer own any shares of Switchboard. The sale of ePresence’s entire holdings of Switchboard stock is subject to the approval of ePresence’s shareholders. However, ePresence may sell up to approximately 5,400,000 of its shares of Switchboard stock without shareholder approval.

As of December 31, 2003, Switchboard had incurred $511,000 of costs associated with the offering, of which $15,000 was paid in 2003. Switchboard has classified these deferred offering costs as a long-term asset on its balance sheet as of December 31, 2003. Switchboard anticipates offsetting these costs with proceeds received from the offering. If the offering is not completed, these costs will be expensed.

NOTE 10. ACCRUED EXPENSES

Accrued expenses consist of the following at:


	December 31,
	2003		2002
	(in thousands)
Compensation	$	2,688	$	2,587
Restructuring		1,881		3,196
Other		1,692		2,739

Total		6,261		8,522

NOTE 11. RESTRUCTURING CHARGES

The following table summarizes activity related to the Company’s restructuring accrual:


	Twelve Months Ended December 31, 2003
	Accrual/ Reserve Balance 12/31/02		Total Other Charges		Cash Payments			Non-cash Charges			Accrual/ Reserve Balance 12/31/03
	(in thousands)
Staff reductions	$	846	$	—	$	(504	)	$	(38	)	$	304
Office closures, asset write-offs and other costs		2,350		—		(776	)		3			1,577

	$	3,196	$	—	$	(1,280	)	$	(35	)	$	1,881

In 2002, as part of the Company’s plan to implement cost-cutting measures, the Company recorded net pre-tax charges of $4,000,000 during the first quarter of 2002 and $1,100,000 in the fourth quarter of 2002, for a combined charge of $5,100,000 for services restructuring activities. The reductions were focused principally on the closure of our offices in Germany and the United Kingdom, reductions in our marketing and general and administrative functions, and the elimination of several senior management and executive-level positions. These charges included workforce reductions of approximately 75 positions, office closures and asset write-offs.

At December 31, 2003, the Company had utilized approximately $3,650,000 in total of the liability of which $1,464,000 was severance related costs, and the remainder related to office closures and asset write-offs. The

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

remaining 2002 liability at December 31, 2003 was approximately $1,450,000 of cash related expenditures. The Company anticipates that it will utilize a substantial portion of the remaining 2002 liability by the end of fiscal year 2004.

In 2001, as part of the Company’s plan to implement cost-cutting measures in its services business, the Company recorded net pre-tax charges of $3,953,000 related to a workforce reduction of approximately 100 positions, office closures and asset write-offs. At December 31, 2003, the Company had utilized approximately $3,532,000 in total of the 2001 liability of which $1,966,000 was severance-related costs, and the remainder related to office closures and asset write-offs. The remaining 2001 liability at December 31, 2003 was approximately $421,000 of cash related expenditures. The Company anticipates that it will utilize a substantial portion of the remaining 2001 liability by the end of fiscal year 2004.

In 2003, Switchboard recorded the reversal of $35,000 of excess restructuring reserves as a special credit. The 2003 reversal resulted primarily from a change in estimate with respect to a compensation amount for a terminated employee that had been provided for as part of Switchboard’s 2001 special charges. In 2002, Switchboard recorded the reversal of $262,000 in excess restructuring reserves as a special credit. The 2002 reversal resulted primarily from better than expected results in the subleasing of idle office space which Switchboard had reserved for as part of its 2002 special charges. Under a non-cancelable sublease, Switchboard received $156,000 and $72,000 in 2003 and 2002, and anticipates receiving $132,000 and $60,000 in 2004 and 2005, respectively.

In December 2001, Switchboard recorded net pre-tax special charges of approximately $17,300,000, comprised primarily of $15,600,000 for the impairment of certain assets, $1,000,000 for costs related to facility closures and $700,000 in severance costs related to the reduction of approximately 21% of Switchboard’s workforce. The restructuring resulted in 21 Switchboard employee separations.

Included in the $15,600,000 impairment charge for certain assets is $11,700,000 recorded for the impairment of the unamortized portion of the value of the common stock issued and amounts prepaid to AOL. Switchboard assessed the value of its assets related to its AOL Directory Agreement for impairment as it had a current period operating loss combined with a history of operating losses with respect to its AOL relationship and revenues were lower at the end of the first year of the Directory Agreement than originally anticipated and Switchboard had incurred a current period and historical operating loss with respect to its AOL business. This analysis was performed as part of Switchboard’s restatement of its financial statements for the year ended December 31, 2001, which occurred in September 2002. However, in performing this impairment analysis, Switchboard was unable to utilize the more favorable financial terms of the April 2002 and August 2002 amendments as they had occurred subsequent to the date Switchboard had filed its original Annual Report on Form 10-K for the year ended December 31, 2001 (March 2002). The financial terms of the April 2002 and August 2002 amendments were developments that occurred subsequent to the March 2002 filing and, in accordance with existing accounting standards, could not be considered. If Switchboard had been able to utilize the more favorable financial terms resulting from the April 2002 and August 2002 amendments, its AOL assets may have been considered to be fully recoverable.

Switchboard’s impairment analysis, utilizing the estimated cash flow approach, included certain revenue and expense assumptions through December 2004, the expiration date of the Directory Agreement. Switchboard assumed annual revenue growth rates of 77%, 135% and 85% under the agreement in 2002, 2003 and 2004, respectively. Switchboard’s expense assumptions included contractually fixed payments of $39,000,000; a total of $4,800,000 of value associated with two additional contractual stock issuances to AOL of 746,260 shares each, which were to have occurred in December 2002 and 2003; and an estimate of other costs and expenses

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Switchboard would incur to support the relationship with AOL. Switchboard’s analysis indicated that the AOL assets were impaired due to the fact that the projected future cash flows from AOL over the remainder of the term of the agreement were insufficient to support the value of the AOL related assets. Switchboard then measured impairment by performing an analysis of the discounted future cash flows under the Directory Agreement using a discount factor of 20% per year. This discounted cash flow analysis indicated that the AOL related assets were fully impaired as of December 31, 2001. Accordingly, a charge of $11,700,000 was recorded as an additional component of special charges during 2001.

In December 2001, Switchboard exercised its rights under the Envenue acquisition agreement to substantially reduce the funding of Envenue. Switchboard evaluated the carrying value of its goodwill in Envenue, and determined it would not be fully recovered through estimated undiscounted future operating cash flows. As a result, in 2001 Switchboard recorded as a component of the $15,600,000 impairment charge, $1,900,000 related to the Envenue goodwill. The impairment was measured as the amount by which the carrying amount of these assets exceeded the present value of the estimated discounted future cash flows attributable to these assets.

Also included in the impairment charge for certain assets are amounts related to prepaid advertising expenses. As a result of Switchboard’s change in overall strategy from a destination site to a technology provider, Switchboard no longer considered this prepaid advertising to be complementary to its corporate strategy. Accordingly, Switchboard recorded $1,400,000 for the impairment of these prepaid advertising assets.

Of Switchboard’s total $1,300,000 facilities and severance charge, which is net of the $35,000 and $262,000 special credits recorded in 2003 and 2002, approximately $1,100,000 was cash related. Switchboard has a remaining liability of $10,000 on its balance sheet as of December 31, 2003 relating to the special charges.

NOTE 12. COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and certain equipment under non-cancelable lease agreements, which expire at various dates through March 2014. Rental expense under these leases totaled $570,000, $679,000 and $1,671,000 in 2003, 2002 and 2001, respectively. Under some of these agreements, the Company is obligated to pay for utilities, taxes, insurance and maintenance.

At December 31, 2003, future minimum lease payments under operating leases with initial terms exceeding one year are as follows (in thousands):


2004	$	1,468
2005		1,124
2006		244
2007		232
2008		232
Thereafter		1,680

Total future minimum lease payments	$	4,980

The total of future minimum rentals to be received under non-cancelable subleases related to the above leases are $333,000 and $250,000 for the years ending 2004 and 2005, respectively.

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which any of the Company’s property is the subject.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On November 21, 2001, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York on behalf of all persons and entities who purchased or otherwise acquired common stock of Switchboard from March 2, 2000 through December 6, 2000. The complaint named as defendants Switchboard, the managing underwriters of Switchboard’s initial public offering, Douglas J. Greenlaw, Dean Polnerow, and John P. Jewett. Mr. Polnerow is Switchboard’s President and CEO, and Mr. Greenlaw and Mr. Jewett are former officers of Switchboard.

An amended complaint was filed on April 20, 2002. The amended complaint alleges violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, primarily based on the assertion that the defendants made material false and misleading statements in Switchboard’s registration statement and prospectus filed with the SEC in connection with Switchboard’s initial public offering because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in Switchboard’s public offering and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. The amended complaint alleges claims under Sections 11 and 15 of the Securities Act, and Sections 10(b) and 20(a) of the Securities Exchange Act. The amended complaint seeks damages in an unspecified amount.

In July 2002, Switchboard, Douglas J. Greenlaw, Dean Polnerow and John P. Jewett joined in an omnibus motion to dismiss challenging the legal sufficiency of plaintiffs’ claims. The motion was filed on behalf of hundreds of issuer and individual defendants named in similar lawsuits. The plaintiffs opposed the motion, and the Court heard oral argument on the motion in November 2002. On February 19, 2003, the court issued its decision on the defendants’ motion to dismiss, granting in part and denying in part the motion as to Switchboard. In addition, in October 2002, Messrs. Greenlaw, Polnerow and Jewett were dismissed from this case without prejudice.

In June 2003, the plaintiffs, the issuer defendants and their insurers agreed on the terms and conditions of a proposed settlement of this case. The terms and conditions of the proposed settlement have been widely reported in the press. Switchboard’s special committee of the board of directors met twice during June 2003 to evaluate the proposed settlement. The committee was advised by outside counsel on the merits of the proposed settlement. The committee determined that the settlement was in the best interests of Switchboard and that they should accept the proposed settlement. There is no guarantee that the settlement will become final, as it is subject to a number of conditions, including court approval; however, based on this proposed settlement. In the third quarter of 2003, Switchboard was informed by outside counsel that all but two of the non-bankrupt issuers decided to accept the terms and conditions of the proposed settlement of this case. The two issuers who did not accept the proposal were in unique circumstances that do not apply to other issuers. Switchboard does not believe they will suffer material future losses related to this lawsuit.

NOTE 13. PREFERRED STOCK

The Company has authorized 1,000,000 shares of an undesignated preferred stock. The preferred stock is $.01 par value and may be issued in one or more series with voting rights and preferences to be determined by the Board of Directors. In March 1998, 263,158 shares were designated as Series A Convertible Preferred Stock and were issued to HarbourVest Partners along with warrants to purchase 65,790 shares of Series B Convertible Preferred Stock and 65,790 shares of Series C Convertible Preferred Stock at an exercise price of $45.00 and $50.00 per share, respectively, in exchange for cash of $9,500,000, net of issuance costs of $500,000. Each share of preferred stock was initially convertible, at the option of the holder, into ten shares of common stock, subject

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

to adjustment for certain dilutive issuances. In June 1999, the 263,158 shares of Series A Convertible Preferred Stock, held by HarbourVest Partners, automatically converted into 2,631,580 shares of common stock. On March 10, 2000, the warrants to purchase shares of Series B and Series C Convertible Preferred Stock converted into warrants to purchase an aggregate of 1,315,800 shares of common stock.

NOTE 14. STOCK OPTION PLANS

Under the Company’s 1992 Stock Incentive Plan, as amended (the “1992 Stock Incentive Plan”), the Company was permitted to grant incentive stock options and non-statutory options for the purchase of an aggregate of 5,470,000 shares of common stock to employees, officers, directors, consultants and advisors. At December 31, 2003, 2,264,362 options and shares were outstanding under this plan, of which 360,000 shares were subject to the Company’s repurchase right and certain other restrictions for a period of up to three years. The 1992 Stock Incentive Plan provided that incentive stock options may not be granted at less than the fair market value of the Company’s common stock at the grant date. Options outstanding under this plan generally vest ratably over a three-year period and expire ten years from the date of grant.

Effective as of June 2002 no further options or other awards may be made under this plan, but options and other awards previously granted may remain outstanding beyond this date.

The 1992 Stock Incentive Plan also permitted awards of restricted stock at a price determined by the Compensation Committee or the Board of Directors subject to the Company’s right to repurchase such stock in specified circumstances prior to the expiration of a restricted period. In October 1998, the Company issued 396,000 shares of restricted common stock to executive officers and certain members of senior management at par value. An amount for unearned compensation of $1,426,000 was recorded within shareholders’ equity equal to the fair market value of the stock on the date it was issued, less the purchase price. An additional 480,000 shares and 40,000 shares of restricted stock were issued in 2000 and 1999, respectively. An additional $2,560,200 and $277,000 was recorded as unearned compensation within shareholders’ equity in 2000 and 1999, respectively, equal to the fair market value of the stock on the date it was issued, less the purchase price. In 2000, 35,600 shares of restricted stock were cancelled, and 10,000 shares of restricted stock were cancelled in 1999. Amortization of $413,715, $724,447 and $1,196,652 was recorded in 2003, 2002 and 2001, respectively, as compensation expense related to these issuances.

The Company currently holds notes receivable for a total of approximately $782,000 from executive officers and other members of senior management of the Company. The notes arose from transactions in 1999, 2000, and 2001 whereby the Company loaned the officers money to pay federal and state tax obligations with respect to the vesting and issuance of restricted stock. The notes bear interest at the applicable Federal rate. The principal plus accrued interest on the remaining $782,000 will be forgiven at a rate of 20% on the anniversary date of the note, over a five-year period subject to continued employment. In 2003 and 2002, $277,000 and $299,000, respectively, were forgiven based on the provisions in the notes. The portion of the notes and the accrued interest to be forgiven within the year are recorded as other current assets and the remaining balance on the notes are recorded as an other non-current asset.

Under the Company’s 2000 Non-Executive Stock Incentive Plan (the “2000 Non-Executive Stock Plan”), the Company may grant non-statutory options for the purchase of an aggregate of 1,250,000 shares of common stock to employees, consultants and advisors. At December 31, 2003, 787,701 options were outstanding under this plan. These options vest ratably over a three-year period and expire ten years from the date of grant.

The 2000 Non-Executive Stock Plan also permits awards of restricted stock at a price determined by the Compensation Committee or the Board of Directors subject to the Company’s right to repurchase such stock in specified circumstances prior to the expiration of a restricted period. On October 19, 2000, the Company issued

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

80,000 shares of restricted stock to certain members of senior management at par value of which no shares were outstanding at December 31, 2003. These shares are subject to the Company’s repurchase right and certain other restrictions for a period of up to two years. An amount for unearned compensation of $454,200 was recorded within shareholders’ equity equal to the fair market value of the stock on the date it was issued, less the purchase price. An additional 6,000 shares of restricted stock were issued in 2001. An additional $25,000 was recorded as unearned compensation within shareholders’ equity in 2001 equal to the fair market value of the stock on the date it was issued, less the purchase price. Amortization of zero, $181,924 and $252,000 was recorded in 2003, 2002 and 2001, respectively, as compensation expense related to these issuances.

Under the Company’s 2001 Stock Incentive Plan (the “2001 Plan”), the Company may grant stock options and other stock based awards for the purchase of an aggregate of 2,500,000 shares of common stock to employees, officers, directors, consultants and advisors. At December 31, 2003, 912,067 options were outstanding under this plan. The 2001 Plan provides that incentive stock options may not be granted at less than the fair market value of the Company’s common stock at the grant date. Options generally vest ratably over a three-year period and expire ten years from the date of grant.

Under the Company’s 1992 Director Stock Option Plan, as amended (the “1992 Director Plan”), the Company may grant non-statutory stock options for the purchase of up to an aggregate of 450,000 shares of common stock to directors of the Company who are not officers or employees of the Company or any subsidiary of the Company. Under the terms of the 1992 Director Plan, initial options are automatically granted to each eligible director upon his or her initial election as a director that cover 40,000 shares of common stock, and annual options are automatically granted on the date of each Annual Meeting of Shareholders of the Company that cover 10,000 shares of common stock. In addition, after four years of service on the Board, each director will automatically receive an option that covers 20,000 shares. The 1992 Director Plan provides that options shall be granted at the fair market value of the Company’s common stock at the grant date. Annual options generally vest twelve months after the grant date and initial options and service options vest ratably over a four-year period. At December 31, 2003, 379,000 options were outstanding under the 1992 Director Plan.

In 2001, the Board of Directors had suspended the Company’s 1995 Employee Stock Purchase Plan until further notice. Under this plan, as amended, 1,050,000 shares of common stock were available to all full-time employees through semi-annual offerings. At December 31, 2003, 1,010,378 shares of common stock had been purchased under this plan.

In May 2000, the Company acquired SND and assumed the 2000 SND Stock Incentive Plan. At December 31, 2003, 35,600 options were outstanding under this plan. The 2000 SND Stock Incentive Plan provides that incentive stock options may not be granted at less than the fair market value of the Company’s common stock at the grant date. Options generally vest ratably over a three-year period and expire ten years from the date of grant.

During 1997, in addition to the options described above, options to purchase an aggregate of 1,300,000 shares were issued to four executive officers of the Company. The underlying shares were registered with the SEC and generally vest over a four-year period. At December 31, 2003, 760,000 of such options were outstanding.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the status of the Company’s stock plans as of December 31, 2003, 2002 and 2001 and changes during the years ending on those dates is presented below.


	2003				2002				2001
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
	(share amounts in thousands)
Outstanding at beginning of year	5,063		$	5.81	5,085		$	6.68	4,447		$	8.81
Granted	846		$	2.21	1,113		$	3.54	1,981		$	3.89
Exercised	(134	)	$	3.49	(16	)	$	2.83	(91	)	$	2.79
Cancelled	(996	)	$	5.74	(1,119	)	$	7.56	(1,252	)	$	6.80

Outstanding at end of year	4,779		$	5.25	5,063		$	5.81	5,085		$	6.68

Options exercisable at end of year	3,603		$	5.99	3,165		$	6.58	2,362		$	6.87

The following table summarizes information about the Company’s stock options at December 31, 2003:

(share amounts in thousands)


		Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
	(share amounts in thousands)
$1.15-$2.25	1,336	6.0 years	$	2.10	816	$	2.19
$2.26-$3.99	1,393	7.5 years	$	3.32	864	$	3.24
$4.00-$6.50	814	6.9 years	$	5.28	695	$	5.40
$6.51-$10.00	565	5.5 years	$	8.90	565	$	8.90
$10.01-$20.00	671	5.9 years	$	12.40	663	$	12.41

	4,779				3,603

NOTE 15.

SWITCHBOARD NOTE RECEIVABLE FOR THE ISSUANCE OF RESTRICTED COMMON STOCK

In January 2002, Switchboard recorded a note receivable from Mr. Greenlaw, its Chief Executive Officer, who was also a member of its Board of Directors, for approximately $1,400,000 arising from the financing of a purchase of 450,000 shares of its common stock as restricted stock by Mr. Greenlaw. As of December 31, 2002, 300,000 of such shares were unvested and restricted from transfer. On each of January 4, 2003, 2004, 2005 and 2006, 75,000 of these restricted shares were to have vested, respectively. The note bore interest at a rate of 4.875%, which was deemed to be fair market value, compounding annually and was 100% recourse as to principal and interest. The note was payable upon the earlier of the occurrence of the sale of all or part of the shares by the issuer of the note, or January 4, 2008. During 2003 and 2002, Switchboard recorded $56,000 and $71,000 in interest income resulting from this note receivable. At December 31, 2002, Switchboard had recorded $1,500,000 in principal and interest as a note receivable classified within stockholders’ equity.

Mr. Greenlaw ceased to be an employee and resigned as a director effective September 2, 2003. In connection with Mr. Greenlaw’s separation of employment, Switchboard recorded, as a component of general and administrative expense, certain separation expenses of $174,000 in 2003 in accordance with Mr. Greenlaw’s

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

employment agreement. At the time Mr. Greenlaw ceased to be affiliated with Switchboard, 225,000 of the original 450,000 shares granted were vested. In September 2003, Switchboard exercised its right to repurchase the remaining 225,000 unvested shares for $725,000, resulting in a corresponding reduction in the outstanding note of $725,000. In accordance with the terms of the note, Mr. Greenlaw repaid the note payable and all accrued interest outstanding to Switchboard in full through payments totaling $851,000. The final payment was received in November 2003.

NOTE 16. STOCK REPURCHASE

In December 2000, the Board of Directors of the Company authorized the repurchase of up to $10,000,000 of its common stock on the open market. Repurchases of stock are at management’s discretion, depending upon acceptable prices and availability. Funds used in the repurchase of shares come from the Company’s existing cash and investment balances along with cash generated from operations. As of December 31, 2003, the Company had expended $7,415,000 toward stock repurchases of which $1,109,000 and $6,140,000 was expended during the years ended December 31, 2003 and 2002, respectively.

NOTE 17. SALE OF INVESTMENT

In 1996, the Company made an equity investment of approximately $2,000,000 in Software.com, Inc. (“Software.com”), a company which supplied Internet messaging solutions to services providers. During the year ended December 31, 2000, the Company sold 491,202 shares of common stock of Software.com, resulting in net proceeds of $45,276,000 and a realized gain of approximately $44,556,000. At December 31, 2000, the Company held 400,000 shares of common stock of Software.com of which 300,000 and 100,000 of said shares were valued at $114.50 and $115.90 per share, respectively, with a total value of $45,940,000. The net unrealized gain of approximately $29,025,000, net of taxes of approximately $16,308,000, is included in other comprehensive income within shareholders’ equity.

In January 2000, the Company entered into a hedging contract for 300,000 shares of Software.com common stock. The maturity date for the contract was February 2, 2001. Upon maturity, the Company received payment for the value of the Software.com common shares based upon the average closing price of the ten consecutive trading days prior to, and including, the maturity date. Under the agreement the settlement price could be no lower than $84.04 and no higher than $114.50 per common share.

In February 2000, the Company entered into a hedging contract for 100,000 shares of Software.com common stock. The maturity date for the contract was February 25, 2001. Upon maturity, the Company received payment for the value of the Software.com common shares based upon the average closing price of the ten consecutive trading days prior to, and including, the maturity date. Under the agreement the settlement price could be no lower than $84.60 and no higher than $115.90 per common share.

On November 17, 2000, Software.com and Phone.com merged and began doing business as Openwave Systems, Inc. (“Openwave”). Each Software.com shareholder received 1.6105 Phone.com shares. On October 26, 2000, the Company entered into two hedging contracts for Openwave shares effectively rolling over its hedging contracts of Software.com common shares. The contracts were adjusted to equivalent Phone.com shares and pricing and maintained the same terms as the original contracts with the exception of maturities. The hedging contract for 483,150 Openwave shares matured between January 23, 2001 and January 29, 2001 and the average settlement price was $67.55 per common share. The hedging contract for 161,050 Openwave shares matured on January 24, 2001 and the settlement price was $70.60 per common share.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In January 2001, the Company liquidated its Openwave position for gross proceeds of approximately $44,006,000 and a realized gain of approximately $33,378,000. The Company paid a fee of $4,740,000 as a result of the early liquidation of the hedge contracts. The gain on sale of Openwave reported by the Company in its statement of operations includes the effect of writing off the previously recorded asset related to these hedges.

NOTE 18. SALE OF SUBSIDIARY

On March 22, 2001, the Company sold its Australian subsidiary to an Australian-based company. The Company exchanged its shares in the Australian subsidiary for a 10% interest in the acquiring company. The Company recorded a $1,039,000 loss as a result of the transaction and valued the 10% interest received at zero.

NOTE 19. INCOME TAXES

The (benefit from)/provision for income taxes consists of the following:


	Years ended December 31,
	2003			2002			2001
	(in thousands)
Current tax expense:
Federal income taxes	$	(318	)	$	—		$	—
State income taxes		8			48			—
Foreign income taxes		—			47			—

Total current expense		(310	)		95			—

Deferred tax expense:
Federal income taxes		(3,500	)		(8,938	)		(31,474	)
State and local		(1,198	)		(1,867	)		(8,879	)
Foreign income taxes		—			—			—
Valuation allowance		4,697			10,805			51,378

Total deferred expense		—			—			11,025

Total (benefit)/provision	$	(310	)	$	95		$	11,025

As a result of the Company’s adoption of SFAS No. 133, the Company had recorded a $1,855 provision as part of its cumulative effect of change in accounting policy in 2001.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The tax effects of the temporary differences that give rise to the deferred tax asset and liabilities at December 31, 2003 and December 31, 2002 were as follows:


	December 31, 2003						December 31, 2002
	Assets			Liabilities			Assets			Liabilities
	(in thousands)
Current:
Bad debts	$	337		$	—		$	568		$	—
Employee benefits and compensation		107			—			72			—
FAS 115		—			—			—			(46	)

Total Current		444						640			(46	)

Non-Current:
Goodwill and other intangibles		9,122			—			9,332			—
Net operating loss and credit carryforwards		54,914			—			47,125			—
Fixed assets		738			—			1,092			—
Accrual to cash		—			(62	)		—			(200	)
Other		1,808						1,528
Prepaid advertising & restructuring		775			—			2,854			—

Total non-current		67,357			(62	)		61,931			(200	)

Total deferred taxes before valuation allowance		67,801			(62	)		62,571			(246	)

Net deferreds before valuation allowance		67,739						62,325
Valuation allowance		(67,739	)					(62,325	)

Net deferred tax asset	$	—					$	—

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax asset will not be realized. The Company believes that sufficient uncertainty exists regarding the realizability of the deferred tax assets such that a valuation allowance of $67,739,000 and $62,325,000 for December 31, 2003 and 2002, respectively, has been established for deferred tax assets.

As of December 31, 2003, the Company has net operating loss carryforwards for federal and state tax purposes of approximately $123,063,000 and $136,590,000, respectively. The federal net operating loss carryforwards will begin to expire in 2012 and the state net operating loss carryforwards began to expire in 2002.

Switchboard is not a member in the Company’s consolidated federal income tax return because they are less than 80% owned by vote and value. As of December 31, 2003, Switchboard has net operating loss carryforwards for federal and state tax purposes of approximately $87,735,000 and $87,726,000, respectively.

As of December 31, 2003, ePresence has net operating loss carryforwards for federal and state tax purposes of approximately $35,328,000 and 48,864,000, respectively from its services business.

Ownership changes resulting in the Company’s issuance of capital stock may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. The amount of the annual limitation is determined based upon the Company’s value immediately prior to the ownership change. Subsequent significant changes in ownership could further affect the limitation in the future.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A reconciliation of the Federal statutory tax rate to the Company’s effective income tax rate is as follows:


	2003		2002		2001
Tax at statutory rate	(35.0	%)	(35.0	%)	(35.0	%)
State Income Taxes, net of U.S. federal benefit	(4.7	)	(4.0	)	(17.6	)
Non-Deductible Goodwill Amortization	—		6.0		6.7
Minority Interest	2.3		(2.1	)	(37.9	)
Foreign Losses not benefited	—		(0.5	)	(3.8	)
Other	0.5		(0.1	)	1.6
Valuation Allowance	—		—		51.3
Losses not benefited	34.7		36.0		68.4

Effective Rate	(2.2	%)	0.3	%	33.7	%

NOTE 20.

BASIC AND DILUTED LOSS PER SHARE

Basic and diluted loss per share is based upon the weighted average number of common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. Potential common shares also include the unvested portion of restricted stock.

Options to purchase 4,779,000, 5,063,000 and 5,085,000 shares of common stock outstanding during the years ended December 31, 2003, 2002 and 2001, respectively, were excluded from the calculation of diluted earnings per share, as their effect would have been antidilutive.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 21. SEGMENT INFORMATION

As described in Note 1. “Nature of Business,” the Company has two reportable segments: Services and Switchboard. Significant financial information relative to the Company’s reportable segments is as follows:


	Years Ended December 31,
	2003			2002			2001
	(in thousands)
Services:
Revenues	$	16,547		$	32,077		$	51,711
Cost of Revenues		11,718			21,649			35,777

Gross Profit		4,829			10,428			15,934
Operating Expenses:
Sales and marketing		6,035			10,329			17,706
General and administrative		8,658			11,078			15,011
Amortization of goodwill and intangibles		—			—			2,668
Termination of vendor relationship		6,500			—			—
Impairment of goodwill		—			14,779			12,364
Restructuring and other charges		—			5,100			3,953

Operating Expenses		21,193			41,286			51,702

Operating loss		(16,364	)		(30,858	)		(35,768	)

Other Income/(Expense):
Interest income, net		593			1,222			2,787
Realized gain, net		44			296			173
Interest in (income)/losses of Switchboard		(1,006	)		1,875			35,048
Gain on sale of Openwave, net		—			—			33,378
Other expenses, net		210			(189	)		(1,615	)

Total other (expense)/income		(159	)		3,204			69,771

Net (loss) from operations before income taxes and cumulative effect of accounting change		(16,523	)		(27,654	)		34,003
(Benefit from)/Provision for income taxes		(352	)		95			11,025

Net loss before cumulative effect of accounting change		(16,171	)		(27,749	)		22,978
Cumulative effect of accounting change, net of tax of $1,855		—			—			3,445

Net loss	$	(16,171	)	$	(27,749	)	$	26,423

Total assets	$	41,256		$	58,631		$	97,116

Total depreciation and amortization expense	$	661		$	969		$	1,885

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Years Ended December 31,
	2003			2002			2001
	(in thousands)
Switchboard:
Revenues	$	15,192		$	11,747		$	9,278
Cost of Revenues		2,925			3,744			3,518

Gross Profit		12,267			8,003			5,760
Operating Expenses:
Sales and marketing		3,264			4,683			24,606
Product development		4,264			5,446			6,702
General and administrative		3,334			4,057			4,181
Amortization of goodwill and intangibles		—			—			719
Special charges		(35	)		(262	)		17,324
Loss on Viacom transaction		—			—			22,203

Operating Expenses		10,827			13,924			75,735

Operating income/(loss)		1,440			(5,921	)		(69,975	)

Other Income/(Expense):
Interest income, net		766			1,712			3,371
Realized (loss)/gain, net		(1	)		382			92
Other expenses, net		(89	)		(132	)		(242	)

Total other income		676			1,962			3,221

Net income/(loss) from operations before income taxes		2,116			(3,959	)		(66,754	)
Provision for income taxes		42			—			—

Net income/(loss)	$	2,074		$	(3,959	)	$	(66,754	)

Total assets	$	59,523		$	57,788		$	65,835

Total depreciation and amortization expense	$	1,213		$	1,521		$	1,235

QUARTERLY FINANCIAL INFORMATION


	2003 Quarters Ended
	Dec. 31			Sept. 30			June 30			March 31
	(in thousands, except per share amounts)
Revenues:
Services	$	3,990		$	4,072		$	4,314		$	4,171
Switchboard		3,769			4,108			3,974			3,341

Total revenues		7,759			8,180			8,288			7,512
Loss from operations(1)		(8,083	)		(1,281	)		(2,143	)		(3,417	)
Net loss		(7,740	)		(1,332	)		(2,076	)		(2,949	)
Basic and diluted net loss per share	$	(0.35	)	$	(0.06	)	$	(0.09	)	$	(0.13	)

	2002 Quarters Ended
	Dec. 31			Sept. 30			June 30			March 31
	(in thousands, except per share amounts)
Revenues:
Services	$	5,472		$	7,360		$	8,952		$	10,293
Switchboard		3,385			3,374			2,068			2,920

Total revenues		8,857			10,734			11,020			13,213
Loss from operations(1)		(19,022	)		(4,535	)		(4,639	)		(8,583	)
Net loss		(18,769	)		(3,266	)		(2,707	)		(6,966	)
Basic and diluted net loss per share	$	(0.84	)	$	(0.15	)	$	(0.12	)	$	(0.31	)

(1)

Includes charges of $6.5 million related to a vendor settlement during 2003. Includes an impairment of goodwill of approximately $14.8 million for our services segment for 2002.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2003 and 2002, the Company focused on the delivery of its services in the United States. For the year ended December 31, 2001, the Company delivered its services worldwide.

Switchboard delivers its revenues within North America. Consolidated revenues can be grouped into geographic areas as follows:


	Years Ended December 31,
	2003		2002		2001
	(in thousands)
Revenues from unaffiliated customers:
North America	$	31,739	$	43,672	$	56,154
Europe		—		152		3,252
Other		—		—		1,583

Total revenues	$	31,739	$	43,824	$	60,989

NOTE 22. MICROSOFT CORPORATION ALLIANCE

In 1999, the Company entered into a strategic alliance with Microsoft Corporation (“Microsoft”) to deliver integrated messaging, networking and Internet solutions and the collaboration on the design and implementation of packaged services, solutions and support offerings based on Microsoft’s enterprise platform. Under the agreement, Microsoft contributed $8,400,000 to fund these initiatives and for certain marketing and product development efforts and the purchase of 1,750,000 common stock warrants. The common stock warrants were subject to a three-year lock-up provision, based on continuation of the alliance, and have an exercise price of $10.00 per share. If exercised, Microsoft’s warrants represented approximately 7.2% ownership of the outstanding common stock of the Company at December 31, 2002. In October 2003, the Company terminated the alliance agreement and in settlement of any further obligations under the agreement and cancellation of the common stock warrants, the Company paid Microsoft $6,500,000.

NOTE 23. RESTRUCTURING OF VIACOM RELATIONSHIP

In 1999, Switchboard and Viacom Inc. (“Viacom”, formerly CBS Corporation) consummated a number of agreements under which Viacom acquired a 35% equity stake in Switchboard, through the issuance of 7,468,560 shares of Switchboard’s common stock and one share of Series E Special Voting Preferred Stock. In exchange, Switchboard received $5,000,000 in cash and the right to receive advertising and promotional value over a term of seven years, across the full range of CBS media properties, as well as those of its radio and outdoor subsidiary, Infinity Broadcasting Corporation. As part of the transactions, Viacom was also issued warrants to purchase up to an additional 1,066,937 shares of Switchboard’s common stock at a per share exercise price of $1.00, which would have increased its ownership position in Switchboard to 40% at the time of the transaction. The number of shares of common stock and warrants issued to Viacom were subject to adjustment in the event of certain future issuances of securities by Switchboard.

The Advertising and Promotion Agreement dated as of June 30, 1999 among Switchboard, ePresence and Viacom provided advertising with a future value of $95,000,000 to Switchboard over a seven-year period, subject to one year renewals upon the mutual written agreement of Switchboard, ePresence and Viacom. The net present value of the advertising was recorded as a contribution receivable for the common stock issued. The contribution receivable was reduced as Switchboard utilized advertising based on the proportion of advertising provided to the total amount to be provided over the seven-year term.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In August 2001, Switchboard entered into a restructuring agreement with Viacom and ePresence, under which, among other things, Switchboard agreed to terminate its right to the placement of advertising on Viacom’s CBS properties with an expected net present value of approximately $44,524,000 in exchange for, primarily, the reconveyance by Viacom to Switchboard of 7,488,560 shares of Switchboard’s common stock, the cancellation of warrants held by Viacom to purchase 533,469 shares of Switchboard’s common stock and the reconveyance to Switchboard of the one outstanding share of Switchboard’s series E special voting preferred stock. In addition, as part of the restructuring of Switchboard’s relationship with Viacom, Switchboard’s license to use specified CBS trademarks terminated on January 26, 2002.

On October 26, 2001, Switchboard obtained approval for the restructuring agreement by its stockholders and closed the transactions contemplated by the restructuring agreement. At the closing, the two individuals who had been elected directors by Viacom pursuant to Viacom’s rights as the holder of Switchboard’s special voting preferred stock resigned as directors of Switchboard. Due to the reduction in the number of outstanding shares of Switchboard’s stock associated with the closing, ePresence became Switchboard’s majority stockholder, beneficially owning approximately 54% of Switchboard’s outstanding stock on October 26, 2001.

In connection with the termination of its advertising and promotion agreement with Viacom, Switchboard recorded a one-time, non-cash accounting loss of $22,203,000 in Switchboard’s 2001 statement of operations. The non-cash accounting loss resulted from the difference between the net present value of Switchboard’s remaining advertising rights with Viacom, which were terminated, and the value of the shares of Switchboard’s common and preferred stock that were reconveyed and the warrants that were cancelled. Switchboard determined the value of the 7,488,560 shares of common stock reconveyed and one share of preferred stock cancelled to be $20,968,000 using the closing market price of Switchboard’s common stock of $2.80 per share on October 26, 2001. Switchboard used the Black-Scholes warrant pricing model to determine a value of $1,352,544 attributable to the canceled warrants.

Subsequently, on February 27, 2002, Viacom exercised its warrant pursuant to a cashless exercise provision in the warrant, resulting in the net issuance of 386,302 shares of common stock. On March 12, 2002, Switchboard repurchased these 386,302 shares of common stock from Viacom at a price of $3.25 per share, for a total cost of $1,300,000. Switchboard recorded the value of these shares as treasury stock at cost.

NOTE 24. AOL ALLIANCE

In December 2000, Switchboard entered into a Directory Agreement with AOL to develop a new directory and local advertising platform and product-set to be featured across specified AOL properties (the “Directory Platform”). In November 2001, April 2002, August 2002, November 2002 and October 2003, certain terms of the agreement were amended. Under the original four-year term of the amended Directory Agreement, Switchboard was to have shared with AOL specified directory advertisement revenue. In general, Switchboard received a majority of the first $12,000,000 of such directory advertisement revenue, less any billable engineering revenue earned from AOL after June 30, 2002, and a lesser share of any additional directory advertisement revenue over and above the initial $12,000,000 pursuant to the August 2002 amendment. Switchboard paid AOL and recorded an asset of $13,000,000 at the signing of the original Directory Agreement. Following the incorporation of the Directory Platform on the AOL.com, AOL Service and Digital City properties (“AOL Roll-In”) in January 2002, Switchboard recorded a second asset and a liability related to future payments of $13,000,000. In April 2002, Switchboard established an additional asset and liability of $1,000,000 and paid $2,000,000 upon the execution of the April 2002 amendment. Under the April 2002 amended agreement, Switchboard was scheduled to make six additional quarterly payments of $2,000,000 each, replacing the $13,000,000 originally owed upon the AOL Roll-In.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The August 2002 amendment, among other things, eliminated the $12,000,000 in remaining additional payments established in the April 2002 amendment. AOL committed to pay Switchboard at least $2,000,000 in consulting or service fees over the term of the agreement under a payment schedule which ended in September 2002, of which AOL paid all $2,000,000 and Switchboard delivered all $2,000,000 in services to AOL. In addition, Switchboard was required to provide up to 300 hours of engineering services per month to AOL at no charge, if requested by AOL for the term of the agreement. These 300 hours were provided to support the Directory Platform, from which Switchboard shared in directory revenue over the term of the amended agreement. Any engineering services provided by Switchboard in excess of 300 hours per month were charged to AOL on a time and materials basis. AOL typically exceeds these 300 hours each month. In 2003, 2002 and 2001, consulting and service fees totaled $2,000,000, $1,500,000 and $1,900,000, respectively.

The October 2003 amendment, among other things, extended the term of the agreement for an additional year until December 11, 2005, and provides that Switchboard will receive $4,800,000 annually from AOL, payable in monthly increments of $400,000, in exchange for providing, maintaining and customizing the AOL yellow pages directory technology and inclusion of current AOL merchants in Switchboard’s yellow pages directory. In addition, the amended agreement creates the opportunity for both parties to share in revenue generated from advertising products that combine both AOL’s and Switchboard’s consumer audience. The revenue sharing arrangement, based on a percentage of AOL merchant subscription revenue, that was previously in effect has been eliminated. AOL and Switchboard are now able to sell advertising products offering both local merchant and national advertisers access to the combined consumer audience of both AOL and Switchboard yellow pages. As part of the consideration for the $4,800,000 annual fee, if requested by AOL, Switchboard is obligated to provide AOL with up to 3,000 hours of engineering services per fiscal quarter in order to customize and further AOL’s directory platform. In addition, AOL may carry-over up to 1,000 of its unused engineering hours into the next quarter. At no time at the end of any fiscal quarter may the unused hours carried forward exceed 1,000 hours. Revenue attributable to any unused hours that are carried forward into the following fiscal quarter are valued using Switchboard’s standard hourly rates for engineering services and deferred until the hours carried forward are either used or the right to use them expires. Switchboard bills AOL on a time and materials basis for any hours of engineering services in excess of the 3,000 hours per quarter and recognizes this revenue during the period in which the engineering services are delivered. The October 2003 amended agreement is subject to earlier termination upon the occurrence of specified events, including, without limitation (1) Switchboard being acquired by one of certain third parties, or (2) AOL acquiring one of certain third parties and AOL paying Switchboard a termination fee of $25,000,000.

Subsequent to the October 2003 amendment to the AOL agreement, Switchboard has bifurcated the monthly fee received from AOL into a directory license fee and an engineering service fee in accordance with EITF No. 00-21, “Revenue Arrangement with Multiple Deliverables” (“EITF No. 00-21”) and SAB 104. EITF 00-21 and SAB 104 allow for accounting for separate elements of contract if the elements qualify as separate accounting units, and if vendor specific evidence of fair value can be established for each element under the arrangement. If vendor specific evidence of fair value cannot be established for all elements under the arrangement, but can be established for the undelivered elements, value may be allocated to the delivered elements based on the residual method. Switchboard has established vendor specific evidence of fair value for the engineering services and has allocated remaining value to the license fees. Switchboard recognizes revenue for each element in accordance with SAB 101 and 104, when evidence of an arrangement exists, fees are fixed and determinable, services have been delivered and collectibility is assured.

In connection with entering into the Directory Agreement, in December 2000, Switchboard issued to AOL 746,260 shares of its common stock, which were restricted from transfer until the AOL Roll-In, which occurred on January 2, 2002. Switchboard valued these shares using the fair market value for its common stock at the time

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of issuance, recording an asset of $3,100,000 in December 2000. Switchboard also agreed to issue to AOL an additional 746,260 shares of common stock if the Directory Agreement continued after two years and a further 746,260 shares of common stock if the Directory Agreement continued after three years. Under the amended agreement, the requirement to issue additional shares upon the two and three-year continuations has been eliminated. If Switchboard renews the Directory Agreement with AOL for at least an additional four years after the initial amended five-year term, Switchboard is required to issue to AOL a warrant to purchase up to 721,385 shares of common stock at a per share purchase price of $4.32. Switchboard will record the value of this potential warrant when it is issuable.

The $13,000,000 paid and the value of the stock issued upon the signing of the Directory Agreement was amortized on a straight-line basis over the original four-year estimated life of the agreement. In accordance with EITF Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”, Switchboard recorded the amortization of its AOL asset as an offset to merchant network revenue of $2,000,000 and $4,000,000 in 2002 and 2001, respectively. As of December 2001 and as part of the September 2002 restatement of Switchboard’s Annual Report on Form 10-K for the year ended December 31, 2001, the remaining unamortized amounts were written down to zero as a result of an impairment analysis as of December 31, 2001 (Note 11). In 2002, Switchboard recorded amortization based upon the remaining net book value of its AOL assets established upon the AOL Roll-In and April 2002 amendment on a straight-line basis over the remaining term of the amended agreement.

As a result of the elimination in the August 2002 amendment of the remaining $12,000,000 owed to AOL, an adjustment to amortization of consideration given to a customer of $482,000 was recorded in 2002, offsetting amortization recorded in the period. Throughout the remaining initial term of the amended agreement, Switchboard will no longer record amortization of consideration given to AOL as these assets are now fully amortized and no further consideration is due AOL. The following table illustrates the amounts provided to AOL and the associated amortization expense and impairment charge in each of the years ended December 31, 2000, 2001 and 2002 (in thousands).


	Years ended December 31,
	2000			2001			2002
Net value of AOL related assets at beginning of period	$	—		$	15,771		$	—
Value of stock issued to AOL(a)		3,183			—			—
Cash paid to AOL(b)		13,000			—			2,000
Amortization of AOL assets(c)		(412	)		(4,048	)		(2,000	)
Impairment of AOL assets(d)		—			(11,723	)		—

Net value of AOL related assets at end of period	$	15,771		$	—		$	—

(a)

Recorded as a component of other assets.

(b)

Recorded as prepaid Directory Agreement.

(c)

Recorded as consideration given to a customer.

(d)

Recorded as a component of special charges.

Revenue recognized from AOL, net of amortization of consideration given to AOL, was $6,265,000, or 41.2% of net Switchboard revenue, $4,906,000, or 41.8% of net Switchboard revenue, and $26,000 in 2003, 2002 and 2001, respectively. Net amounts due from AOL included in accounts receivable at December 31, 2002 were $549,000. There were no amounts due from AOL at December 31, 2003. As of December 31, 2003, AOL beneficially owned 7.8% of Switchboard’s outstanding common stock.

ePRESENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 25. RELATED PARTIES

The Chairman of the Board of Directors of Switchboard is also Chairman of the Board of Directors, President and Chief Executive Officer of the Company. One director of Switchboard is Senior Vice President and Chief Financial Officer of the Company and another director of Switchboard is also a director of the Company.

The Company currently holds notes receivable for a total of approximately $782,000 from officers and senior executives of the Company. The notes arose from transactions in 1999, 2000, and 2001 whereby the Company loaned the officers money to pay federal and state tax obligations with respect to the vesting and issuance of restricted stock. The notes bear interest at the applicable Federal rate. The notes provide that the principal plus accrued interest on the remaining $777,000 will be forgiven at a rate of 20% on the anniversary date of each note, over a five-year period subject to continued employment. The notes and accrued interest are recorded as an other non-current asset. In 2003 and 2002, $274,000 and $299,000, respectively, was forgiven based on the provisions in the notes. If the plan of liquidation discussed in Note 1 is approved, the notes receivable will be forgiven.

NOTE 26. SUBSEQUENT EVENT

On March 26, 2004, Switchboard announced a definitive agreement to be acquired by InfoSpace, Inc. (“InfoSpace”). In connection with the transaction, all of the outstanding shares of Switchboard will be converted into a right to receive $7.75 per share in cash, without interest, and Switchboard will become a wholly-owned subsidiary of InfoSpace. The completion of the transaction is subject to several conditions, including shareholder and regulatory approval.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item with respect to Executive Officers of the Company may be found under the section captioned “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K.

Our Board of Directors is divided into three classes of directors (designated Class I Directors, Class II Directors and Class III Directors), with members of each class holding office for staggered three-year terms. There are currently two Class III Directors, whose terms expire at the 2004 Annual Meeting, one Class I Director whose term expires at the 2005 Annual Meeting and three Class II Directors, whose terms expire at the 2006 Annual Meeting (in all cases subject to the election and qualification of successor directors or their earlier death, resignation or removal). There is currently one Class I director vacancy.

Class III Directors (Terms expire at 2004 Annual Meeting)

Albert A. Notini, 47, has been a director of the Company since October 1999. Since October 2000, Mr. Notini has served as Executive Vice President and Chief Financial Officer of Manufacturers’ Services Limited, a global electronic manufacturing services company. From May 2000 to October 2000, Mr. Notini served as Executive Vice President and General Counsel of Manufacturers’ Services Limited. From July 1999 to May 2000, Mr. Notini served as Executive Vice President at Getronics, N.V., a Netherlands-based network services company and acquirer of Wang Global Corporation in 1999. From February 1994 to June 1999, Mr. Notini served as General Counsel for Wang Global Corporation, an information technology network services company. From January 1999 to June 1999, Mr. Notini also served as Executive Vice President, Corporate Development and Administration at Wang. Prior to joining Wang, Mr. Notini was a senior partner at the law firm of Hale and Dorr LLP in Boston, Massachusetts. Mr. Notini is a director of Sonus Networks, Inc.

William P. Ferry, 51, has been Chairman of the Board since October 1997. He has been a director of the Company and served as President and Chief Executive Officer since February 1997. Mr. Ferry has served as a director of Switchboard since March 1997 and has been Switchboard’s Chairman of the Board since February 1998. From August 1990 to February 1997, he served in various management capacities at Wang Laboratories, Inc., a global network and desktop integration and services company, including President, Services Division from July 1994 to February 1997 and Senior Vice President and General Manager, North American Operations from January 1993 to July 1994.

Class I Director (Term expires at 2005 Annual Meeting)

John J. Rando, 52, has been a director of the Company since October 1999. Presently, Mr. Rando is Chairman of the Board of @Stake, Inc., Ecora Software Corp. and Storability Software, Inc. Mr. Rando is a director of Cognos, Inc. From November 1999 through September 2002, Mr. Rando has served as an advisor partner at NewcoGen Group LLC. From June 1998 to July 1999, Mr. Rando served as Senior Vice President and Group General Manager at Compaq Computer Corporation, a global supplier of computing systems and enterprise solutions. From November 1976 to June 1998, Mr. Rando served as Senior Vice President and Group General Manager at Digital Equipment Corporation, a provider of client/server computing solutions.

Class II Directors (Terms expire at 2006 Annual Meeting)

John F. Burton, 52, has been a director of the Company since 1991. From November 1996 to October 1997, he served as Chairman of the Board. Since 1997, Mr. Burton has been a Managing Director of Updata Capital, Inc., an investment banking firm, and is a Managing General Partner of Updata Venture Partners, LLC, a venture capital firm.

Fontaine K. Richardson, 62, has been a director of the Company since 1984. From 1983 to December 2000, he was a General Partner of Eastech Management Company, a private venture capital firm. He is currently a private investor. Mr. Richardson is a director of Mentor Graphics Corporation and Network Engines, Inc.

Robert M. Wadsworth, 44, has been a director of the Company since March 1998. He has been a managing director of HarbourVest Partners, LLC, a venture capital management company, since January 1997. He joined Hancock Venture Partners, Inc. in July 1986. HarbourVest Partners, LLC assumed the business of Hancock Venture Partners, Inc. He is a director of Switchboard, Concord Communications, Inc., Trintech Group PLC, Network Engines, Inc. and several private companies. Mr. Wadsworth is a general partner of several private equity funds managed by HarbourVest.

Corporate Governance, Board of Directors and Committee Meetings

Corporate Governance. The Company is subject to the rules and regulations of the Securities and Exchange Commission and the NASDAQ Stock Market. Due, in part, to the enactment of the Sarbanes-Oxley Act of 2002, the Company has addressed, and continues to address, the changing regulatory environment by reviewing and, where appropriate, adopting new corporate governance and public disclosure procedures in response to Securities and Exchange Commission and NASDAQ rule implementations. In light of certain recently finalized rules, the Company will be, among other things, revising and updating the charters of the Company’s Board committees to more closely align the responsibilities of the committee members with updated Securities and Exchange Commission and NASDAQ requirements.

Board of Directors. The Board of Directors held eight meetings during 2003. Each director attended at least 75% of the meetings of the Board and of the Committee(s) of the Board on which he then served. The Board of Directors has standing Audit, Compensation and Nominating Committees.

Audit Committee. The members of the Audit Committee are Messrs. Richardson, Rando and Wadsworth. As specified in its charter, the Audit Committee consists entirely of independent, non-employee, financially literate directors. The board of directors has determined that Mr. Richardson is a financial expert. The Audit Committee recommends to the Board of Directors the appointment of the Company’s independent auditors and, if so determined by the Committee, recommends that the Board of Directors replace the independent auditors, and evaluates the performance of the independent auditors. Other responsibilities include the review, in consultation with the independent auditors, of the audit results and the independent auditors’ proposed opinion letter or audit report and any related management letter. The Audit Committee reviews with management and the independent auditors each of the quarterly and year-end financial statements and reviews internal accounting procedures and controls with the Company’s financial and accounting staff. The Audit Committee met five times during 2003.

Compensation Committee. The Compensation Committee consists entirely of independent non-employee directors, and the members are Messrs. Burton, Notini and Richardson. The Compensation Committee establishes the policies governing all executive compensation plans and determines the compensation of each executive officer under such plans. The Compensation Committee also grants options under and administers the various option and employee stock purchase plans. The Compensation Committee met one time during 2003.

Nominating Committee. The current Nominating Committee members are Messrs. Burton, Ferry and Richardson. The Nominating Committee provides recommendations to the Board with respect to candidates for directors of the Company. The Nominating Committee considers nominees recommended by stockholders of the Company. Any stockholder may submit such a recommendation in writing to the Nominating Committee by addressing it to the attention of the Secretary of the Company. The Nominating Committee did not meet during 2003.

Code of Ethics. We have adopted a code of ethics, our Standards of Business Conduct, that applies to our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions. Our Standards of Business Conduct, as well as our corporate governance guidelines and the charter for the Audit Committee of our Board of Directors is available to any stockholder who requests it by writing to ePresence, Inc., 120 Flanders Road, Westboro, Massachusetts 01581. Attention: Investor Relations. We do not plan to disclose information about any amendments to, or waivers from our Standards of Business Conduct on our website.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)

The following documents are filed as part of or are included in this Annual Report on Form 10-K:

Consolidated Financial Statements:

•

Report of Independent Auditors

•

Consolidated Balance Sheets as of December 31, 2003 and 2002.

•

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

•

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001.

•

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

•

Notes to Consolidated Financial Statements.

Consolidated Financial Statement Schedules:

•

Schedule II—Valuation and Qualifying Accounts.

•

Schedules other than the one listed above have been omitted since they are either not required, not applicable or the information is otherwise included.

Listing of Exhibits:

•

The Exhibits filed as part of this Annual Report on Form 10-K/A are listed in the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. Documents listed on such Exhibit Index, except for documents identified by footnotes, are being filed as exhibits herewith. Documents identified by footnotes are being incorporated by reference herein and, pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, reference is made to such documents as previously filed with the Securities and Exchange Commission.

(b)

On October 23, 2003 the Company filed form 8-K and reported under Item 5 regarding the Announcement Agreement to Sell Its Services Business and Plan of Liquidation. No other reports on Form 8-K were filed during the quarter ended December 31, 2003.

SCHEDULE II

ePRESENCE, INC.

VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2003, 2002 and 2001

(dollars in thousands)


Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Deductions		Balance at end of Period
Year ended December 31, 2003
Reserve for sales and doubtful account allowance	$	1,330	$	33	$	728	$	635
Year ended December 31, 2002
Reserve for sales and doubtful account allowance	$	1,973	$	716	$	1,359	$	1,330
Year ended December 31, 2001
Reserve for sales and doubtful account allowance	$	1,278	$	2,482	$	1,787	$	1,973

SIGNATURES

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


Dated: May 4, 2004	EPRESENCE, INC.

	By:	/s/ RICHARD M. SPAULDING
		Richard M. Spaulding
		Senior Vice President and Chief Financial Officer, Treasurer and Clerk (Principal Financial and Principal Accounting Officer)

EXHIBIT INDEX


Number		Title of Document
2.1(3)		Stock Purchase Agreement by and among the Registrant Strategic Network Designs, Inc. and the Stockholders of Strategic Network Designs, Inc., dated May 11, 2000.

2.2A(18)		Amendment to Stock Purchase Agreement among the Registrant, David R. Rovner and Ranjan Sinja, individually and as the Stockholders’ Representative of the stockholders of ePresence CRM, Inc. (formerly Strategic Network Designs, Inc.).

2.3(27)		Asset Purchase Agreement dated October 22, 2003 between ePresence, Inc. and Unisys Corporation.

2.4		(reserved)

2.5(27)		Plan of Complete Liquidation and Dissolution of ePresence, Inc.

2.6		(reserved)

3.1(2)		Second Amended and Restated Articles of Organization of the Registrant.

3.2(16)		Articles of Amendment to Second Amended and Restated Articles of Organization, as filed with the Secretary of the Commonwealth of Massachusetts on May 9, 2000.

3.3(1)		Amended and Restated By-Laws of the Registrant.

3.3A(14)		Amendment No. 1 to Amended and Restated By-Laws of the Registrant.

10.1		(reserved)

10.2		(reserved)

10.3+(15)		1992 Stock Incentive Plan, as amended.

10.3A+(10)		Form of Incentive Stock Option for grant under the 1992 Stock Incentive Plan, as amended.

10.3B+(10)		Form of Non-Qualified Stock Option for grant under the 1992 Stock Incentive Plan, as amended.

10.3C+(18)		Revised form of Incentive Stock Option for grant under the 1992 Stock Incentive Plan, as amended.

10.3D+(18)		Revised form of Non-Qualified Stock Option for grant under the 1992 Stock Incentive Plan, as amended.

10.3E+(23)		Form of Director Non-Statutory Stock Option Agreement, under the 1992 Stock Incentive Plan, as amended.

10.3F+(24)		Form of Director Non-Statutory Stock Option Agreement, under the 1992 Stock Incentive Plan, as amended.

10.3G+(24)		Form of Director Non-Statutory Stock Option Agreement, under the 1992 Stock Incentive Plan, as amended.

10.4+(15)		1992 Director Stock Option Plan, as amended.

10.4A+(26)		Amendment No. 6 to the 1992 Director Stock Option Plan

10.5+(17)		Deferred Compensation Plan of the Registrant.

10.6+(4)		Employment Agreement dated February 4, 1997 between the Registrant and William P. Ferry.

10.6A+(5)		Amendment No. 1 dated as of June 17, 1997 to Employment Agreement between the Registrant and William P. Ferry.

10.6B+(9)		Amendment No. 2 dated as of October 16, 1998 to Employment Agreement between the Registrant and William P. Ferry.


Number		Title of Document

10.6C+(14)		Amendment No. 3 dated as of December 8, 1999 to Employment Agreement between the Registrant and William P. Ferry.

10.6D+(18)		Amendment No. 4 dated as of November 16, 2000 to Employment Agreement between the Registrant and William P. Ferry.

10.6E+(22)		Amendment No. 5 to Employment Agreement between the Registrant and William P. Ferry dated October 15, 2001.

10.7(1)		Lease Agreement dated April 21, 1989, as amended to date, between the Registrant and CB Westboro C Limited Partnership, a Texas Limited Partnership.

10.7A(9)		Amendment to Lease Agreement dated April 21, 1993 between the Registrant and CB Westboro C Limited Partnership, a Texas Limited Partnership.

10.7B(18)		Amendment to Lease Agreement dated July 22, 1994 between the Registrant and CB Westboro C Limited Partnership, a Texas Limited Partnership.

10.7C(18)		Amendment to Lease Agreement dated September 19, 1995 between the Registrant and Commonwealth Westboro Limited Partnership, a Massachusetts Limited Partnership (as successor in interest to CB Westboro C Limited Partnership, a Texas Limited Partnership).

10.8		(reserved)

10.9(6)		Form of Warrant issued by the Registrant to Foothill Capital Corporation.

10.10(7)		Preferred Stock and Warrant Purchase Agreement dated as of March 5, 1998 between the Registrant and HarbourVest Partners V-Direct Fund L.P.

10.11(16)		Common Stock Purchase Warrant issued to HarbourVest Venture Partners V-Direct Fund L.P. on June 30, 2000, replacing the Series B Convertible Preferred Stock Purchase Warrant, dated as of March 5, 1998.

10.12(16)		Common Stock Purchase Warrant issued to HarbourVest Venture Partners V-Direct Fund L.P. on June 30, 2000, replacing the Series C Convertible Preferred Stock Purchase Warrant, dated as of March 5, 1998.

10.13+(9)		Executive Retention Agreement dated as of October 16, 1998 between the Registrant and Richard M. Spaulding.

10.13A+(21)		Amendment No. 1 to Executive Retention Agreement between the Registrant and Richard M. Spaulding dated July 26, 2001.

10.14+(9)		Executive Retention Agreement dated as of October 16, 1998 between the Registrant and Anthony J. Bellantuoni.

10.14A+(21)		Amendment No. 1 to Executive Retention Agreement between the Registrant and Anthony J. Bellantuoni dated July 26, 2001.

10.15+(9)		Executive Officer Restricted Stock Agreement dated October 16, 1998 between the Registrant and William P. Ferry.

10.16+(9)		Executive Officer Restricted Stock Agreement dated October 16, 1998 between the Registrant and Richard M. Spaulding.

10.17+(9)		Executive Officer Restricted Stock Agreement dated October 16, 1998 between the Registrant and Anthony J. Bellantuoni.

10.18*(11)		Alliance Agreement dated January 8, 1999 between the Registrant and Microsoft Corporation.

10.19(11)		Warrant Purchase Agreement January 8, 1999 between the Registrant and Microsoft.

10.20(11)		Common Stock Purchase Warrant issued by the Registrant to Microsoft on January 8, 1999.


Number		Title of Document

10.21+(11)		Employment Letter dated as of January 15, 1999 between the Registrant and Scott G. Silk.

10.21A+(21)		Amendment No. 1 to Employment Letter between the Registrant and Scott G. Silk dated July 26, 2001.

10.22+(11)		Non-Qualified Stock Option Agreement dated February 4, 1997 granted by the Registrant to William P. Ferry.

10.23+(11)		Non-Qualified Stock Option Agreement dated June 11, 1997 granted by the Registrant to Anthony J. Bellantuoni.

10.24(12)		Common Stock and Warrant Purchase Agreement dated as of June 1, 1999 by and among Switchboard Incorporated, the Registrant and CBS Corporation, as amended.

10.24A(13)		Amendment No. 2 to Common Stock and Warrant Purchase Agreement by and among Switchboard Incorporated, the Registrant and CBS Corporation, effective as of July 1, 1999.

10.25*(12)		Common Stock Purchase Warrant issued by Switchboard Incorporated to CBS Corporation on June 30, 1999.

10.26*(12)		Advertising and Promotion Agreement dated as of June 30, 1999 by and among CBS Corporation, the Registrant and Switchboard Incorporated.

10.27(12)		License Agreement dated as of June 30, 1999 by and between CBS Corporation and Switchboard Incorporated.

10.28(12)		Warrant Purchase Agreement dated as of June 1, 1999 by and between the Registrant and CBS Corporation.

10.29(12)		Common Stock Purchase Warrant issued by the Registrant to CBS Corporation on June 30, 1999.

10.30+(14)		Non-Qualified Stock Option Agreement dated October 21, 1999 granted by the Registrant to William P. Ferry.

10.31+(14)		Non-Qualified Stock Option Agreement dated December 8, 1999 granted by the Registrant to William P. Ferry.

10.32+(14)		Executive Officer Restricted Stock Agreement dated October 8, 1999 between the Registrant and Scott G. Silk.

10.33+(16)		Pledge Agreement between the Registrant and Richard M. Spaulding, dated May 5, 2000.

10.34+(16)		Pledge Agreement between the Registrant and Anthony J. Bellantuoni, dated May 5, 2000.

10.35		(reserved)

10.36		(reserved)

10.37		(reserved)

10.38+(18)		Corporate Officer Restricted Stock Agreement between the Registrant and William P. Ferry, dated December 21, 2000.

10.39+(18)		Corporate Officer Restricted Stock Agreement between the Registrant and William P. Ferry, dated December 21, 2000.

10.40+(18)		Corporate Officer Restricted Stock Agreement between the Registrant and Richard M. Spaulding, dated December 1, 2000.

10.41+(18)		Corporate Officer Restricted Stock Agreement between the Registrant and Anthony J. Bellantuoni, dated December 1, 2000.


Number		Title of Document

10.42+(18)		Corporate Officer Restricted Stock Agreement between the Registrant and Scott G. Silk, dated December 1, 2000.

10.43+(18)		Pledge Agreement between the Registrant and Scott Silk, dated October 8, 2000.

10.43A+(21)		Amendment No. 1 to Pledge Agreement between the Registrant and Scott G. Silk dated July 26, 2001.

10.44+(18)		Pledge Agreement between the Registrant and Richard Spaulding, dated October 16, 2000.

10.44A+(21)		Amendment No. 1 to Pledge Agreement between the Registrant and Richard M. Spaulding dated July 26, 2001.

10.45+(18)		Pledge Agreement between the Registrant and Anthony Bellantuoni, dated October 16, 2000.

10.45A+(21)		Amendment No. 1 to Pledge Agreement between the Registrant and Anthony J. Bellantuoni dated July 26, 2001.

10.46(18)		Termination of Stockholders’ Voting Agreement by and among the Registrant, Switchboard Incorporated and Viacom Inc. (formerly CBS Corporation), dated January 1, 2001.

10.47+(18)		Non-Qualified Stock Option Agreement between the Registrant and William P. Ferry, dated January 25, 2001.

10.48+		(reserved)

10.49+(20)		2001 Stock Incentive Plan, as amended.

10.49A+(24)		Amendment No. 1 to the 2001 Stock Incentive Plan

10.49B+(26)		Amendment No. 2 to the 2001 Stock Incentive Plan

10.50+(20)		Form of Incentive Stock Option Agreement under the 2001 Stock Incentive Plan, as amended.

10.51+(20)		Form of Non-Statutory Stock Option Agreement under the 2001 Stock Incentive Plan, as amended.

10.52+(21)		Secured Promissory Note issued to the Registrant by Richard M. Spaulding, dated July 26, 2001.

10.53+(21)		Secured Promissory Note issued to the Registrant by Anthony J. Bellantuoni, dated July 26, 2001.

10.54+(21)		Secured Promissory Note issued to the Registrant by Scott G. Silk, dated July 26, 2001.

10.55+(22)		Letter of Employment dated as of August 11, 1999 between the Registrant and Rodney P. Jackson.

10.56+(22)		Restricted Stock Agreement between the Registrant and Rodney P. Jackson dated October 19, 2000.

10.57+(22)		Non-Statutory Stock Option Agreement dated January 25, 2001 granted by the Registrant to Rodney P. Jackson.

10.58+(22)		Non-Statutory Stock Option Agreement dated July 26, 2001 granted by the Registrant to Scott G. Silk.

10.59+(22)		Promissory Note issued to the Registrant by William P. Ferry dated July 26, 2001.

10.60+(22)		Secured Promissory Note issued to the Registrant by Scott G. Silk dated October 8, 2001.

10.61+(22)		Pledge Agreement between the Registrant and Scott G. Silk dated October 8, 2001.

10.62+(22)		Non-Qualified Stock Option Agreement dated October 15, 2001 granted by the Registrant to William P. Ferry.


Number		Title of Document

10.63+(25)		Letter of Employment dated as of February 14, 2003 between the Registrant and Scott E. Kitlinski.

10.64(25)		Loan and Security Agreement dated as of November 7, 2002 between the Registrant and Silicon Valley Bank.

10.65(25)		Unconditional Guaranty dated as of November 7, 2002 by ePresence Securities Corporation for the benefit of Silicon Valley Bank.

10.66+(25)		Non-Qualified Stock Option Agreement dated February 7, 2003 granted by the Registrant to William P. Ferry.

10.67+(25)		2000 Non-Executive Stock Incentive Plan.

10.67A+(25)		Amendment No. 1 to the 2000 Non-Executive Stock Incentive Plan.

10.68+(26)		Amendment No. 6 dated as of May 8, 2003 to the Employment Agreement between the Registrant and William P. Ferry.

10.69+(26)		Amendment No. 6 dated as of May 8, 2003 to the Employment Agreement between the Registrant and Richard M. Spaulding.

10.70+(26)		Amendment No. 6 dated as of May 8, 2003 to the Employment Agreement between the Registrant and Scott G. Silk.

10.71+(26)		Amendment No. 6 dated as of May 8, 2003 to the Employment Agreement between the Registrant and Scott E. Kitlinski.

10.72+(26)		Amendment No. 6 dated as of May 8, 2003 to the Employment Agreement between the Registrant and Anthony J. Bellantuoni.

10.73+(28)		Amendment to the Employment Agreement between the Registrant and William P. Ferry dated October 22, 2003.

10.74+(28)		Amendment to Key Employee Retention Agreement between the Registrant and Scott E. Kitlinski dated October 23, 2003.

10.75(30)		Termination and Settlement Agreement dated October 20, 2003 between the Registrant and Microsoft Corporation.

10.76(29)		Amended and restated Directory and Local Advertising Platform Services Agreement by and between Switchboard Incorporated and America Online, Inc., dated March 15, 2004.

14.1		Code of Business Conduct and Ethics

21(30)		Subsidiaries of the Registrant.

23.1		Consent of Ernst & Young LLP.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.

Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.

(1)

Incorporated herein by reference to the exhibits to the Registrant’s Registration statement on Form S-1 (File No. 33-49194).

(2)

Incorporated herein by reference to the exhibits to the Registrant’s Registration statement on Form S-8 (File No. 33-54140).

(3)

Incorporated herein by reference to the exhibits to the Registrant’s Current Report on Form 8-K, filed May 25, 2000.

(4)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 000-20364).

(5)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 000-20364).

(6)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (File No. 000-20364).

(7)

Incorporated herein by reference to the exhibits to the Registrant’s Current Report on Form 8-K dated March 5, 1998 (File No. 000-20364).

(8)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 000-20364).

(9)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-20364).

(10)

Incorporated herein by reference to the exhibits to the Registrant’s Registration Statement on Form S-8 (File No. 333-70553).

(11)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999.

(12)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999.

(13)

Incorporated herein by reference to Exhibit 10.4A to Switchboard Incorporated’s Registration Statement on Form S-1 (File No. 333-90013), filed on October 29, 1999, as amended.

(14)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed March 30, 2000.

(15)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000.

(16)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.

(17)

Incorporated herein by reference to the exhibits to the Registrant’s Registration Statement on Form S-8, filed June 22, 2000 (File No. 333-39860).

(18)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed April 2, 2001.

(19)

Incorporated herein by reference to the exhibits to the Registrant’s Registration Statement on Form S-8, filed May 11, 2001 (File No. 333-60764).

(20)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001.

(21)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001.

(22)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

(23)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002.

(24)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002.

(25)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

(26)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003.

(27)

Incorporated herein by reference to the exhibits to the Registrant’s Current Report on Form 8-K dated October 23, 2003.

(28)

Incorporated herein by reference to the exhibits to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003.

(29)

Incorporated herein by reference to the exhibits to Switchboard Incorporated’s Current Report on Form 8-K/A (File No. 000-28871) dated March 15, 2004.

(30)

Incorporated herein by reference to the exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.