Edgar Filing: VERTICALNET INC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-25269

VERTICALNET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

PENNSYLVANIA 23-2815834
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

507 PRUDENTIAL ROAD
HORSHAM, PA 19044
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(215) 328-6100

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 the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:

As of October 31, 2001, 98,561,793 shares of the Registrant's common stock
were outstanding.

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VERTICALNET, INC.

FORM 10-Q
(FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001)

TABLE OF CONTENTS

PAGE
----

Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements........................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 43
Item 2. Changes in Securities and Use of Proceeds................... 43
Item 3. Defaults Upon Senior Securities............................. 44
Item 4. Submission of Matters to a Vote of Security Holders......... 44
Item 5. Other Information........................................... 44
Item 6. Exhibits and Reports on Form 8-K............................ 44

VERTICALNET, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 52,609 $ 123,803
Short-term investments.................................... 333 21,349
Accounts receivable, net of allowance for doubtful
accounts of $1,208 in 2001 and $2,072 in 2000.......... 3,438 31,932
Prepaid expenses and other assets......................... 13,476 37,264
----------- ----------
Total current assets................................... 69,856 214,348
----------- ----------
Property and equipment, net................................. 20,287 32,398
Net assets of discontinued operations....................... -- 215,000
Goodwill and other intangibles, net of accumulated
amortization of $411,766 in 2001 and $149,015 in 2000..... 99,941 388,341
Long-term investments....................................... 785 22,861
Other investments........................................... 23,800 17,543
Other assets................................................ 20,688 32,793
----------- ----------
Total assets........................................... $ 235,357 $ 923,284
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,254 $ 10,821
Accrued expenses.......................................... 18,281 67,251
Deferred revenues......................................... 53,529 57,323
Other current liabilities................................. 15,594 1,597
----------- ----------
Total current liabilities.............................. 96,658 136,992
----------- ----------
Long-term debt.............................................. 655 952
Other long-term liabilities................................. 785 22,630
Convertible notes........................................... 21,705 21,705
----------- ----------
Total liabilities...................................... 119,803 182,279
----------- ----------
Commitments and contingencies (see Notes 8 and 9)
Minority interest........................................... -- 40,843
----------- ----------
Series A 6.00% convertible redeemable preferred stock, $.01
par value 250,000 shares authorized, 107,675 shares issued
in 2001 and 101,450 issued in 2000 plus accrued dividends
of $1,615 in 2001 (liquidation value of $107,675)......... 100,288 94,760
----------- ----------
Shareholders' equity:
Preferred stock $.01 par value, 9,750,000 shares
authorized, none issued in 2001 and 2000............... -- --
Common stock $.01 par value, 1,000,000,000 shares
authorized, 98,363,345 shares issued in 2001 and
88,047,949 shares issued in 2000....................... 984 880
Additional paid-in capital................................ 1,035,895 1,004,149
Deferred compensation..................................... (116) (363)
Accumulated other comprehensive loss...................... (2,454) (14,370)
Accumulated deficit....................................... (1,018,238) (384,089)
----------- ----------
16,071 606,207
Treasury stock at cost, 656,356 shares in 2001 and 2000... (805) (805)
----------- ----------
Total shareholders' equity............................. 15,266 605,402
----------- ----------
Total liabilities and shareholders' equity............. $ 235,357 $ 923,284
=========== ==========

See accompanying notes to consolidated financial statements.
3

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2001 2000 2001 2000
--------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)

Revenues..................................... $ 31,755 $ 34,455 $ 101,498 $ 71,763
COSTS AND EXPENSES:
Editorial and operational.................... 7,214 15,771 33,564 28,737
Product development.......................... 7,535 9,259 24,135 22,433
Sales and marketing.......................... 11,163 20,914 58,759 54,814
General and administrative................... 11,842 19,543 44,026 36,744
Amortization expense......................... 18,973 42,144 108,109 97,749
Restructuring and asset impairment charges
(see Note 5)............................... 15,029 -- 241,373 --
In-process research and development charge... -- -- -- 10,000
--------- -------- --------- ---------
Operating loss............................... (40,001) (73,176) (408,468) (178,714)
--------- -------- --------- ---------
Other income (expense)....................... (199,397) (2,063) (222,373) 66,451
Interest income (expense), net............... (384) 679 595 1,634
--------- -------- --------- ---------
Loss from continuing operations.............. (239,782) (74,560) (630,246) (110,629)
DISCONTINUED OPERATIONS:
Income (loss) from operations of the
VerticalNet Exchanges segment........... -- 68 -- (7,469)
Loss on disposal of the VerticalNet
Exchanges segment....................... -- -- (3,903) --
--------- -------- --------- ---------
Net loss..................................... (239,782) (74,492) (634,149) (118,098)
Preferred stock dividends and accretion...... (1,867) (1,522) (5,528) (2,972)
--------- -------- --------- ---------
Loss attributable to common shareholders..... $(241,649) $(76,014) $(639,677) $(121,070)
========= ======== ========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations...................... $ (2.46) $ (0.88) $ (6.61) $ (1.40)
Loss from discontinued operations.......... -- -- -- (0.09)
Loss on disposal of discontinued
operations.............................. -- -- (0.04) --
--------- -------- --------- ---------
Loss per common share...................... $ (2.46) $ (0.88) $ (6.65) $ (1.49)
========= ======== ========= =========
Weighted average common shares outstanding
used in basic and diluted loss per share
calculation................................ 98,131 86,616 96,201 81,508
========= ======== ========= =========

See accompanying notes to consolidated financial statements.
4

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
--------- ---------
(UNAUDITED)

Net loss.................................................... $(634,149) $(118,098)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, amortization and other noncash charges...... 120,964 103,829
Noncash restructuring charges............................. 67,658 --
Intangible asset impairment............................... 155,035 --
Write-down related to cost method, equity method and
available-for-sale investments.......................... 218,558 --
Loss from equity method investments....................... 2,312 1,217
Loss on disposal of discontinued operations............... 3,903 --
Net loss (gain) on investment............................. 2,188 (79,875)
In-process research and development charge................ -- 10,000
Discontinued operations -- working capital changes and
noncash charges......................................... -- 82,944
Change in assets and liabilities, net of effect of
acquisitions:
Accounts receivable..................................... 28,440 (16,554)
Prepaid expenses and other assets....................... 10,644 (24,716)
Accounts payable........................................ (1,017) 5,000
Accrued restructuring charge expenses................... 7,946 --
Other accrued expenses.................................. (50,847) 8,491
Deferred revenues....................................... (2,902) 47,046
--------- ---------
Net cash provided by (used in) operating activities....... (71,267) 19,284
--------- ---------
Investing activities:
Acquisitions, net of cash acquired........................ (24,601) (6,589)
Purchase of available-for-sale investments................ -- (85,936)
Proceeds from sale of assets.............................. 425 --
Purchase of cost and equity method company investments,
net of liquidation proceeds............................. (2,959) (20,800)
Proceeds from sale and redemption of available-for-sale
investments............................................. 21,025 107,014
Restricted cash........................................... 6,979 (8,321)
Capital expenditures...................................... (14,759) (24,712)
Discontinued operations -- investing activities........... -- (40,034)
--------- ---------
Net cash used in investing activities..................... (13,890) (79,378)
--------- ---------
Financing activities:
Principal payments on long-term debt and obligations under
capital leases.......................................... (2,170) (1,570)
Proceeds from the issuance of common stock................ 15,000 --
Proceeds from forward sale of Ariba holdings.............. -- 47,441
Net proceeds from issuance of Series A convertible
redeemable preferred stock.............................. -- 99,900
Proceeds from exercise of stock options and employee stock
purchase plan........................................... 1,133 27,739
Discontinued operations -- financing activities........... -- (43,392)
--------- ---------
Net cash provided by financing activities................. 13,963 130,118
--------- ---------
Net increase (decrease) in cash............................. (71,194) 70,024
Cash and cash equivalents -- beginning of period............ 123,803 7,636
--------- ---------
Cash and cash equivalents -- end of period.................. $ 52,609 $ 77,660
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 1,324 $ 14,874
========= =========
Supplemental schedule of noncash investing and financing
activities:
Issuance of common stock as consideration for
acquisitions............................................ $ 21,290 $ 617,212
Warrant exercises......................................... -- 653
Equipment acquired under capital leases................... 741 736
Conversion of convertible subordinated debentures to
common stock............................................ -- 90,400
Preferred dividends....................................... 5,528 2,972

See accompanying notes to consolidated financial statements.
5

VERTICALNET, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION LOSS DEFICIT STOCK EQUITY
------ ------ ---------- ------------ ------------- ----------- -------- -------------

Balance, December 31,
2000..................... 88,048 $880 $1,004,149 $(363) $(14,370) $ (384,089) $(805) $ 605,402
Series A 6.00% convertible
redeemable preferred
stock dividends accrued
and accretion............ -- -- (5,528) -- -- -- -- (5,528)
Exercise and acceleration
of options............... 1,181 12 903 -- -- -- -- 915
Shares issued through
employee stock purchase
plan..................... 262 3 332 -- -- -- -- 335
Shares issued pursuant to
Sumitomo's investment.... 2,763 28 14,972 -- -- -- -- 15,000
Shares issued as
consideration for
acquisitions............. 6,109 61 21,229 -- -- -- -- 21,290
Unearned compensation...... -- -- (162) 162 -- -- -- --
Amortization of unearned
compensation............. -- -- -- 85 -- -- -- 85
Net loss................... -- -- -- -- -- (634,149) -- (634,149)
Other comprehensive income
(loss)................... -- -- -- -- 11,916 -- -- 11,916
------ ---- ---------- ----- -------- ----------- ----- ---------
Balance, September 30, 2001
(unaudited).............. 98,363 $984 $1,035,895 $(116) $ (2,454) $(1,018,238) $(805) $ 15,266
====== ==== ========== ===== ======== =========== ===== =========

See accompanying notes to consolidated financial statements.
6

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(IN THOUSANDS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2001 2000 2001 2000
--------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)

Net loss..................................... $(239,782) $(74,492) $(634,149) $(118,098)
Unrealized gain on forward sale.............. 1,536 -- 21,844 --
Foreign currency translation adjustment...... 1,142 -- (375) --
Unrealized loss on investments:
Unrealized gain (loss)..................... (1,687) 18,225 (20,098) (4,550)
Reclassification adjustment for loss
included in net loss.................... -- -- 10,545 --
--------- -------- --------- ---------
Comprehensive loss........................... $(238,791) $(56,267) $(622,233) $(122,648)
========= ======== ========= =========

See accompanying notes to consolidated financial statements.
7

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) VERTICALNET, INC. AND BASIS OF PRESENTATION

Description of the Company

Verticalnet, Inc. ("Verticalnet," "the Company," "we," "us" or other
similar expressions), through its subsidiaries, provides e-commerce solutions
targeted at distinct business segments. We deploy and provide enterprise
software solutions that enable organizations to achieve excellence in planning,
decision-making, and execution within their own organizations and across their
extended value chains. Additionally, through our Small/Medium Business group
(formerly referred to as Verticalnet Markets), we operate 59 industry
marketplaces that connect buyers and suppliers online by providing
industry-specific news and relevant product and service information. Buyers are
able to quickly locate and source products and services online while suppliers
are able to generate sales leads by showcasing their products and services
across our industry marketplaces and multiple third-party marketplaces to reach
highly qualified buyers and specifiers.

On January 31, 2001, we completed the sale of our Verticalnet Exchanges
("NECX") business unit, which focused on trading electronic components and
hardware in open and spot markets. The operating results of this unit have been
reflected as a discontinued operation in our consolidated financial statements.
The net assets of this unit were reflected at December 31, 2000 as net assets of
discontinued operations on our consolidated balance sheet.

Our consolidated financial statements as of and for the three and nine
months ended September 30, 2001 and September 30, 2000 have been prepared
without audit pursuant to the rules and regulations of the United States
Securities and Exchange Commission ("SEC"). In the opinion of management, the
unaudited interim consolidated financial statements that accompany these notes
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly our results of operations for the three and nine
months ended September 30, 2001 and September 30, 2000 and cash flows for the
nine months ended September 30, 2001 and September 30, 2000. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the SEC's rules and regulations relating to interim
financial statements. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
included in our Annual Report on Form 10-K for the year ended December 31, 2000.

Revenue Recognition

We generate revenue from three primary sources: e-enablement and
e-commerce; advertising and services; and software licensing and related
services.

E-enablement and e-commerce revenues include storefront, marketplace
manager and e-commerce center fees and e-commerce fees. Storefront, marketplace
manager and e-commerce center fees are recognized ratably over the period of the
contract. E-commerce fees in the form of transaction fees, percentage of sale
fees or minimum guaranteed fees are recognized upon receipt of payment.
E-commerce fees from books and other product sales are recognized in the period
in which the products are shipped.

Advertising revenues, including buttons and banners, are recognized ratably
over the period of the applicable contract if time based or as delivered if
impression based. Newsletter sponsorship revenues are recognized when the
newsletters are e-mailed. Although advertising contracts generally do not extend
beyond one year, certain contracts are for multiple years. We also enter into
strategic co-marketing agreements to develop co-branded Web sites. Hosting and
maintenance service revenues under these co-marketing arrangements are
recognized ratably over the term of the contract. In the normal course of
business, we enter into "multiple-element" arrangements. We allocate revenue
under such arrangements based on the fair value of each element, to the extent
objectively determinable, and recognize revenue upon delivery or consummation of
the separable earnings process attributable to each element.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenues from software licensing and related services are accounted for
under Statement of Position ("SOP") 97-2, Software Revenue Recognition, and
related guidance in the form of technical questions and answers published by the
American Institute of Certified Public Accountants' task force on software
revenue recognition. SOP 97-2 requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on vendor
specific objective evidence of fair values of the elements. License revenue
allocated to software products is recognized upon delivery of the software
products or ratably over a contractual period if unspecified software products
are to be delivered during that period. Revenue allocated to hosting and
maintenance services is recognized ratably over the contract term and revenue
allocated to professional services is recognized as the services are performed.
For certain agreements where the professional services provided are essential to
the functionality or are for significant production, modification or
customization of the software products, both the software product revenue and
service revenue are recognized on a straight-line basis or in accordance with
the provisions of SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.

At September 30, 2001 and December 31, 2000, approximately $0.5 million and
$4.2 million, respectively, of the accounts receivable balance was unbilled due
to customer payment terms.

Pursuant to the consensus reached by the Emerging Issues Task Force
("EITF") in Issue No. 99-17, Accounting for Advertising Barter Transactions,
barter transactions are recorded at the estimated fair value of the
advertisements or other services given, based on recent historical cash
transactions. Barter revenue is recognized when the advertising impressions or
other services are delivered to the customer, and advertising expense is
recorded when the advertising impressions or other services are received from
the customer. If we receive the advertising impressions or other services from
the customer prior to our delivery of the advertising impressions, a liability
is recorded on the consolidated balance sheet. If we deliver the advertising
impressions to the customer prior to receiving the advertising impressions or
other services, a prepaid expense is recorded on the consolidated balance sheet.
For the three months ended September 30, 2001 and 2000 and for the nine months
ended September 30, 2001 and 2000, we recognized approximately $2.0 million,
$0.8 million, $6.3 million and $6.6 million of advertising revenues,
respectively, and $1.5 million, $1.7 million, $7.6 million and $6.0 million of
advertising expenses, respectively, from barter transactions. We have
approximately $0.9 million and $2.3 million in prepaid expenses related to
barter transactions as of September 30, 2001 and December 31, 2000,
respectively.

Adoption of New Pronouncement

Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the consolidated
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in other income (expense). If the
derivative is designated as a cash flow hedge, the effective portion of changes
in the fair value of the derivative is recorded in other comprehensive income
(loss) and is recognized in other income (expense) when the hedged item affects
earnings. The ineffective portion of changes in the fair value of cash flow
hedges is recognized in other income (expense).

We use derivative instruments to manage exposures to foreign currency and
security prices. Our objective for holding derivatives is to effectively
eliminate or reduce the impact of these exposures.

In July 2000, we entered into forward sale contracts relating to a security
classified as an available-for-sale investment under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Under these contracts, we
pledged the securities to the counterparty for a three-year period in return for
approximately $47.4 million of cash, which was net of the initial cost of the
transaction of approximately
9

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$5.0 million. At the conclusion of the three-year period, we have the option of
delivering either cash or the pledged securities to satisfy the forward sale.
However, we will not be required to deliver shares in excess of those we
pledged. The forward sale has been designated as a cash flow hedge with
corresponding gains and losses recorded in other comprehensive loss. The amounts
recorded in other comprehensive loss will be recognized in other income
(expense) when the forward sale is settled in July 2003. The unrealized gain on
the forward sale as of December 31, 2000 of $29.8 million was previously
recorded in other comprehensive loss, and changed by $1.5 million and $21.8
million during the three months and nine months ended September 30, 2001,
respectively. The unrealized gain on the forward sale as of September 30, 2001
is $51.6 million and is reflected as a reduction of other long-term liabilities.

During the nine months ended September 30, 2001, we also had fixed
obligations denominated in Euros that we hedged with foreign currency forwards
to reduce the foreign currency fluctuation risk. These foreign currency forward
agreements, which were all settled prior to June 30, 2001, had been classified
as fair value hedges. The transition adjustment from adopting SFAS No. 133 for
these agreements was immaterial. During the nine months ended September 30,
2001, we recorded approximately $0.2 million in other income (expense) related
to these foreign currency forward contracts.

Recent Accounting Pronouncements

EITF Issue No. 00-21, Accounting for Multiple-Element Revenue Arrangements,
is currently being discussed by the EITF. Issues being addressed by an EITF
working group include determining when elements of multiple element arrangements
should be evaluated separately and how consideration should be allocated to the
individual elements. We are closely monitoring the EITF's discussions on this
issue. We do not anticipate changes in our historical accounting policies;
however, there can be no assurance that the final consensus and guidance
ultimately issued by the EITF on this issue will not impact us in the future.

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated or completed after June 30, 2001. SFAS No.
141 also specifies criteria that must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported separately
from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS No. 142, which will be
effective January 1, 2002, requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.

As of January 1, 2002, the adoption date of SFAS No. 142, any remaining
unamortized goodwill and identifiable intangible assets will be subject to the
transition provisions of SFAS Nos. 141 and 142. Amortization expense related to
goodwill and other intangible assets was $105.4 million and $96.7 million for
the nine months ended September 30, 2001 and 2000, respectively. Because of the
extensive effort required to adopt SFAS Nos. 141 and 142, it is not practicable
to reasonably estimate the impact of adopting these Statements on our financial
statements at the date of this report.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS No. 121. For
example, SFAS No. 144 provides guidance on how a long-lived asset that is used
as part of a group should be evaluated for impairment, establishes criteria for
when a long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. SFAS No. 144
retains the basic provisions of APB No. 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike SFAS No.
121, an impairment assessment under SFAS No. 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS
No. 142.

We plan to adopt SFAS No. 144 effective January 1, 2002. We do not expect
the adoption of SFAS No. 144 for long-lived assets held for use to have a
material impact on our financial statements because the impairment assessment
under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the
Statement for assets held for sale or other disposal generally are required to
be applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, we cannot determine the potential effects that adoption
of SFAS No. 144 will have on our financial statements.

(2) DISCONTINUED OPERATIONS

On January 31, 2001, we completed the sale of our Verticalnet Exchanges
segment to Converge, Inc. ("Converge"), a private company. Verticalnet Exchanges
was comprised of NECX.com LLC, a business purchased in December 1999, and its
subsequent acquisitions of R.W. Electronics, Inc. ("RWE") and F&G Capital, Inc.
d/b/a American IC Exchange ("AICE"). In consideration for the sale to Converge,
we received 10,371,319 shares of Series B convertible preferred stock and
1,094,751 shares of non-voting common stock, representing approximately 18.0%
and 1.9%, respectively, of Converge's equity at the closing of the transaction.
We were also entitled to receive $60.0 million of cash at closing, subject to
adjustment based on a comparison of Verticalnet Exchanges' net worth and working
capital as of October 31, 2000 and as of the closing date. The final net worth
and working capital adjustment calculation performed in the second quarter of
2001, following a post-closing audit, resulted in us making an aggregate payment
of $12.8 million to Converge. Approximately $6.5 million of the $12.8 million
was paid on January 31, 2001 as an estimated payment, $1.6 million was paid in
June 2001 and the balance of $4.7 million was paid in July 2001.

The sale of Verticalnet Exchanges was treated as a nonmonetary exchange
pursuant to the guidance in APB No. 29, Accounting for Nonmonetary Transactions,
and EITF Issue No. 00-05, Determining Whether a Nonmonetary Transaction is an
Exchange of Similar Productive Assets. Accordingly, we used the fair value of
Verticalnet Exchanges of $215.0 million, as determined by an independent
appraisal, to value our investment in Converge, which is a privately held
company (see Note 3). We are accounting for our investment in Converge under the
cost method of accounting for investments. We recorded an estimated loss on
disposal of Verticalnet Exchanges of $82.0 million during the year ended
December 31, 2000, which included an estimated loss from operations of $9.0
million for the month of January 2001. During the nine months ended September
30, 2001, we recorded an additional $3.9 million loss on disposal due to the
final calculation of the net worth and working capital adjustment payment. Also
in January 2001, in connection with the sale of Verticalnet Exchanges to
Converge, we settled AICE's remaining earnout provisions by issuing 1,101,549
shares of our common stock, valued at approximately $10.0 million, which was
considered in calculating our original loss on disposal.

The sale of Verticalnet Exchanges represented the disposal of a business
segment. Accordingly, the results of this segment have been shown separately as
a discontinued operation, and prior periods have been restated. The net assets
of the discontinued operation have been classified separately on the December
31, 2000 consolidated balance sheet.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenues and losses from the discontinued operation are as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2001 2000 2001 2000
----- --------- ------- --------
(IN THOUSANDS)

Exchange transaction sales.................. $ -- $229,502 $32,604 $496,770
Cost of exchange transaction sales.......... -- 190,224 27,173 413,791
---- -------- ------- --------
Net exchange revenues..................... $ -- $ 39,278 $ 5,431 $ 82,979
==== ======== ======= ========
Income (loss) from discontinued
operations................................ $ -- $ 68 $ -- $ (7,469)
Loss on disposal of discontinued
operations................................ $ -- $ -- $(3,903) $ --

The assets and liabilities of the Verticalnet Exchanges segment as of
December 31, 2000 were as follows:

(IN THOUSANDS)

Current assets.............................................. $ 27,573
Property and equipment, net................................. 22,809
Intangible assets, net...................................... 155,680
Other non-current assets.................................... 9,424
Current liabilities......................................... (486)
--------
Net assets of discontinued operations....................... $215,000
========

(3) INVESTMENTS

Available-For-Sale

As of September 30, 2001, we have short-term available-for-sale investments
of approximately $0.3 million. These are investments in publicly traded
companies for which we do not have the ability to exercise significant influence
and are stated at fair market value based on quoted market prices. Our
investment in Ariba, Inc. ("Ariba") common stock of approximately $0.8 million
at September 30, 2001 is classified as long-term due to a forward sale of our
shares. During the nine months ended September 30, 2001, we recognized an
impairment charge, included in other income (expense), of approximately $10.5
million on our Ariba investment for an other than temporary decline, based on
the difference between the original recorded cost of the investment and the fair
market value of the shares as of the forward sale contract date.

In July 1999, we acquired 414,233 shares of the Series C preferred stock of
Tradex Technologies, Inc. ("Tradex") for $1.0 million. In December 1999, Tradex
entered into an Agreement and Plan of Reorganization with Ariba. On March 10,
2000, pursuant to the terms of the Agreement and Plan of Reorganization, our
investment in Tradex was exchanged for 566,306 shares of Ariba's common stock,
of which 64,310 shares were placed in escrow for one year subsequent to the
transaction's closing. Based on the fair market value of Ariba's common stock on
March 10, 2000, we recorded an $85.5 million gain on the disposition of the
Tradex investment. After selling 140,000 shares in March 2000 at a loss of $5.6
million, we recorded a net investment gain of $79.9 million for the three months
ended March 31, 2000. In March 2001, 49,982 of our escrowed Ariba shares were
released, with the remaining 14,328 shares being held in escrow pending the
resolution of a dispute under the Agreement and Plan of Reorganization. In light
of the continued uncertainty around whether the Ariba shares remaining in escrow
will eventually be released to us, we recorded a $2.2 million loss on investment
during the three months ended March 31, 2001 to adjust the original investment
gain we recorded when the transaction closed. To the extent the pending dispute
is resolved in whole or in part in Tradex's favor, we will subsequently record
an additional adjustment.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cost Method Investments

At September 30, 2001 and December 31, 2000, cost method investments were
approximately $23.6 million and $12.2 million, respectively. During the three
months ended September 30, 2001, we recorded a $195.4 million impairment to our
Converge investment which was previously valued at $215.0 million (see Note 2).
The impairment charge was based on an independent valuation of our Converge
investment which we obtained subsequent to Converge's announcement that it would
restructure its business. During the three and nine months ended September 30,
2001, we recorded additional impairment charges of approximately $1.2 million
and approximately $10.8 million, respectively, which are included in other
income (expense), for an other than temporary decline in the fair value of
several of our other cost method investments. During the three and nine months
ended September 30, 2001, we recognized revenue of approximately $0.2 million
and $1.7 million, respectively, from commercial arrangements with cost method
investees, excluding revenue from Converge (see Note 4).

Equity Method Investments

At September 30, 2001 and December 31, 2000, our equity method investments
were approximately $0.2 million and $5.4 million, respectively. Our loss from
equity method investments, which is included in other income (expense), is
approximately $0.5 million and $2.3 million for the three and nine months ended
September 30, 2001, respectively. During the nine months ended September 30,
2001, we recognized revenue, net of proportional eliminations, of approximately
$0.5 million from our equity method investees. During the three and nine months
ended September 30, 2001, we recorded impairment charges of approximately $1.1
million and $1.8 million, respectively, which is included in other income
(expense), as a result of the pending dissolution of three of our investees.

(4) STRATEGIC RELATIONSHIPS

Microsoft

On April 26, 2001, we entered into a new agreement with Microsoft (the "New
Microsoft Agreement"), which terminated and replaced the original commercial
agreement we entered into with Microsoft on March 29, 2000 (the "Original
Microsoft Agreement"). Under the New Microsoft Agreement, Microsoft prepaid to
us $40.0 million for the upsell or deployment of enablement products on their
behalf through April 2002. The $40.0 million payment under the New Microsoft
Agreement replaced the net cash flows that we expected to receive under the
Original Microsoft Agreement of approximately $49.2 million in 2001 and $5.1
million in 2002, as previously reported in Note 9 to our consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2000.

Collectively, under the Original and New Microsoft Agreements, during the
three and nine months ended September 30, 2001, we recognized approximately
$17.2 million and $45.7 million, respectively, in e-enablement and advertising
revenue and we had expenses of approximately $8.9 million during the nine months
ended September 30, 2001, for advertising, software licensing and support under
the Original Microsoft Agreement. As of September 30, 2001, we have
approximately $31.4 million of deferred revenue related to our Microsoft
Agreements.

Converge

In December 2000, we entered into a subscription license agreement and
professional services agreements with Converge. The agreements provided, among
other things, for us to receive an aggregate of $108 million during the
three-year terms of the agreements. On October 9, 2001, we and Converge
terminated the professional services agreements, amended and restated the
subscription license agreement and entered into a maintenance and support
agreement. The amended and restated subscription license agreement has a term of

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18 months and provides for Converge to make payments of $22.0 million prior to
May 2, 2002. The maintenance and support agreement also has a term of 18 months
and provides for Converge to make payments of $4.5 million during the term of
the agreement. Our receipt of the aggregate payments of $26.5 million under the
amended and restated subscription license agreement and the maintenance and
support agreement would replace all remaining payments under the original
subscription license agreement and the professional services agreement, for
which, as of September 30, 2001, we had received an aggregate of approximately
$39.3 million of the $108.0 million. The payments of $26.5 million and the
remaining deferred revenue of approximately $16.7 million under the original
agreements will be recognized on a straight-line basis through March 2003.
During the three and nine months ended September 30, 2001, we recognized
revenues of approximately $9.0 million and $23.7 million, respectively, under
the original agreements.

(5) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

First Quarter 2001 Restructuring and Asset Impairment

During the first quarter of 2001, we announced strategic and organizational
initiatives designed to realign business operations, eliminate acquisition
related redundancies and reduce costs. As a result of these initiatives, we
recorded a restructuring charge of approximately $7.5 million. Of this amount,
approximately $4.0 million was paid through September 30, 2001. The following
table provides a summary by category and a rollforward of the changes in this
restructuring accrual for the nine months ended September 30, 2001:

RESTRUCTURING
AND ASSET ACCRUAL AT
IMPAIRMENT CASH NON-CASH SEPTEMBER 30,
CHARGES PAYMENTS CHARGES OTHER 2001
------------- -------- -------- ----- -------------
(IN THOUSANDS)

Lease termination costs.................. $1,593 $ (920) $ -- $151 $824
Employee severance and related
benefits............................... 2,847 (2,993) -- 185 39
Other exit costs......................... 36 (38) -- 2 --
Asset disposals, net of cash received.... 1,496 -- (1,600) 104 --
Goodwill and other intangible assets..... 1,493 -- (1,493) -- --
------ ------- ------- ---- ----
$7,465 $(3,951) $(3,093) $442 $863
====== ======= ======= ==== ====

The $0.9 million accrued at September 30, 2001 is reflected in accrued
expenses on the consolidated balance sheet.

The amount accrued at September 30, 2001 for lease termination costs
relates to two leases, out of the original twenty leases included in the
restructuring charge, that have not yet been terminated. The amount represents
the net expense expected to be incurred to sublet the facilities or the
estimated cost of terminating the lease contracts before the end of their
respective terms.

The amount accrued at September 30, 2001 for employee severance and related
benefits relates to severance payments which have not yet been made to employees
whose positions were eliminated as part of the reduction in workforce. The
reduction in workforce included approximately 240 people.

During the second and third quarters of 2001, we recorded additional
expenses of approximately $0.2 million, $0.2 million and $0.1 million related to
lease termination costs, employee termination benefits and asset disposals,
respectively, due to changes in estimates from the original charges. The
additional expenses recorded in the second and third quarters of 2001 are
reflected in restructuring and asset impairment charges in the consolidated
statements of operations. The remaining restructuring accrual at September 30,
2001 is expected to be adequate to cover actual amounts to be paid. Differences,
if any, between the estimated amounts accrued and the actual amounts paid will
be reflected in operating expenses in future periods.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Second Quarter 2001 Restructuring and Asset Impairment

During the second quarter of 2001, we implemented a second restructuring
plan designed to further reduce our cost structure. As a result, and in
conjunction with an assessment of our intangible assets, we recorded a
restructuring and asset impairment charge of approximately $218.4 million in the
second quarter. Of this amount, approximately $4.7 million was paid through
September 30, 2001. The following table provides a summary by category and a
rollforward of the changes in this restructuring accrual for the nine months
ended September 30, 2001:

RESTRUCTURING
AND ASSET ACCRUAL AT
IMPAIRMENT CASH NON-CASH SEPTEMBER 30,
CHARGES PAYMENTS CHARGES OTHER 2001
------------- -------- --------- ----- -------------
(IN THOUSANDS)

Lease termination costs................ $ 3,244 $ (742) $ -- $(223) $2,279
Employee severance and related
benefits............................. 4,170 (3,834) (63) 81 354
Other exit costs....................... 60 (79) -- 39 20
Asset disposals, net of cash
received............................. 8,847 -- (8,743) (104) --
Goodwill and other intangible assets... 202,073 -- (202,064) (9) --
-------- ------- --------- ----- ------
$218,394 $(4,655) $(210,870) $(216) $2,653
======== ======= ========= ===== ======

The $2.7 million accrued at September 30, 2001 is reflected in accrued
expenses on the consolidated balance sheet.

The amount accrued at September 30, 2001 for lease termination costs
relates to three leases, out of the original four leases included in the
restructuring charge, that have not yet been terminated. The amount represents
the net expense expected to be incurred to sublet the facilities or the
estimated cost of terminating the lease contracts before the end of their terms.

We also impaired $202.1 million of identifiable intangible assets and
goodwill in accordance with SFAS No. 121. The impairment assessment was
performed primarily due to the significant decline in our stock price, the net
book value of our assets significantly exceeding our market capitalization and
the overall decline in industry growth rates which indicated that this trend may
continue for an indefinite period. As a result, we recorded a $155.0 million
impairment charge in the second quarter of fiscal year 2001 to reduce goodwill
and other intangible assets associated with our Tradeum acquisition to their
estimated fair value. Tradeum was a development stage software company purchased
in March 2000. The acquisition was financed principally with shares of our
common stock and valued based on the price of our stock at that time. The
estimate of fair value was based upon the valuation of comparable publicly held
businesses. The remaining Tradeum goodwill and other intangible assets of
approximately $100.2 million at June 30, 2001 (approximately $85.7 million at
September 30, 2001) will continue to be amortized using the straight-line method
over their remaining lives.

We also recorded a $47.1 million impairment charge in the second quarter of
fiscal year 2001 to write off goodwill and other intangible assets associated
with various acquisitions related to our Small/Medium Business group, including
approximately $20.6 million related to our acquisition of Verticalnet Europe
B.V. ("Verticalnet Europe"). In conjunction with our second quarter and third
quarter restructuring of the Small/ Medium Business group, we estimated the fair
value of the continuing business based upon the amounts we could reasonably
expect to realize in the sale of those assets.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During the third quarter of 2001, we recorded adjustments of approximately
$(0.2) million, $0.1 million and $(0.1) million related to lease termination
costs, employee termination benefits and asset disposals, respectively, due to
changes in estimates from the original charges. The adjustments recorded in the
third quarter of 2001 are reflected in restructuring and asset impairment
charges in the consolidated statements of operations. The remaining
restructuring accrual at September 30, 2001 is expected to be adequate to cover
actual amounts to be paid. Differences, if any, between the estimated amounts
accrued and the actual amounts paid will be reflected in operating expenses in
future periods.

Third Quarter 2001 Restructuring and Asset Impairment

During the third quarter of 2001, we implemented a third restructuring plan
in a continuing effort to further reduce our cost structure. As a result of this
plan, we recorded a restructuring and asset impairment charge of $15.3 million
in the third quarter. The following table provides a detail of the charges and
cash payments made by category as well as the amounts accrued as of September
30, 2001:

RESTRUCTURING
AND ASSET ACCRUAL AT
IMPAIRMENT CASH NON-CASH SEPTEMBER 30,
CHARGES PAYMENTS CHARGES 2001
------------- -------- -------- --------------
(IN THOUSANDS)

Lease termination costs......................... $ 1,730 $ (120) $ -- $1,610
Employee severance and related benefits......... 4,725 (1,987) -- 2,738
Other exit costs................................ 177 (61) -- 116
Asset disposals, net of cash received........... 8,656 -- (8,656) --
------- ------- ------- ------
$15,288 $(2,168) $(8,656) $4,464
======= ======= ======= ======

The $4.5 million accrued at September 30, 2001 is reflected in accrued
expenses on the consolidated balance sheet.

Lease termination costs include the estimated cost to close office
facilities and represent the amount required to fulfill our obligation under
lease contracts, the net expense expected to be incurred to sublet the
facilities, or the estimated cost of terminating the lease contracts before
their terms. Also included are estimated costs to terminate various other
furniture and computer equipment operating leases.

The reduction in workforce included approximately 420 employees. The
reduction in workforce included employees from the following areas: editorial
and operations, product development, sales and marketing, and general and
administrative.

Asset disposals include software, leasehold improvements, furniture and
computer equipment that will not be used in our ongoing operations due to the
restructuring.

The remaining restructuring accrual at September 30, 2001 is expected to be
adequate to cover actual amounts to be paid. Differences, if any, between the
estimated amounts accrued and the actual amounts paid will be reflected in
operating expenses in future periods.

(6) LOSS PER SHARE

Basic loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted loss per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period, including incremental common shares
issuable upon the exercise of stock options and warrants (using the treasury
stock method) and the conversion of our 5 1/4% convertible subordinated
debentures and our Series A 6.00% convertible redeemable preferred

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock (using the if-converted method). Common equivalent shares are excluded
from the calculation if their effect is anti-dilutive.

The following table sets forth the computation of loss per common share:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2001 2000 2001 2000
--------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Basic and diluted loss per share:
Loss from continuing operations................. $(239,782) $(74,560) $(630,246) $(110,629)
Preferred stock dividends and accretion....... (1,867) (1,522) (5,528) (2,972)
--------- -------- --------- ---------
Loss from continuing operations attributable to
common shareholders........................... (241,649) (76,082) (635,774) (113,601)
Gain (loss) from discontinued operations........ -- 68 -- (7,469)
Loss on disposal of discontinued operations..... -- -- (3,903) --
--------- -------- --------- ---------
Loss attributable to common shareholders...... $(241,649) $(76,014) $(639,677) $(121,070)
========= ======== ========= =========
Basic and diluted loss per common share:
Continuing operations......................... $ (2.46) $ (0.88) $ (6.61) $ (1.40)
Loss from discontinued operations............. -- -- -- (0.09)
Loss on disposal of discontinued operations... -- -- (0.04) --
--------- -------- --------- ---------
Basic and diluted loss per common share......... $ (2.46) $ (0.88) $ (6.65) $ (1.49)
========= ======== ========= =========

(7) SEGMENT INFORMATION

During the first quarter of 2001 and following the sale of Verticalnet
Exchanges, management began evaluating the financial operating performance of
the business as two distinct business units, the Small/ Medium Business group
and the Enterprise group, formerly referred to as Verticalnet Markets and
Verticalnet Solutions, respectively. Comparative information for the same
quarter in the prior year is not readily available. All prior segment
information for Verticalnet Exchanges has been classified as a discontinued
operation.

In April 2001, we announced our intention to consolidate our two business
units into a single operating segment in order to streamline operations and
reduce redundant positions and costs. Although we unified operations during the
second quarter, we continue to evaluate the financial performance of the Company
based on our two segments. These segments include the Small/Medium Business
group, which consists of the operations of our 59 industry marketplaces,
including e-enablement and e-commerce revenues and advertising and services
revenues; and the Enterprise group, which consists of our enterprise software,
professional services and related services operations.

The reporting segments follow the same accounting policies used for our
consolidated financial statements. Management evaluates the segments'
performance primarily on revenues generated and income (loss) before non-cash,
other non recurring items and preferred stock dividends. Corporate costs, such
as senior executive, finance, human resources, legal, facilities and technology
expenses, are currently included in the Enterprise group information since we do
not internally allocate any portion of these costs to the Small/ Medium Business
group. Corporate costs were approximately $9.5 million and $25.0 million,
respectively, for the three and nine months ended September 30, 2001. With the
exception of goodwill and other intangible asset amortization and impairments,
all other non-cash expenses, non recurring items and preferred stock dividends
are included in the reconciling items column. The non-cash and other non
recurring items reflected in the reconciling items column are composed primarily
of restructuring and asset impairment charges, investment impairment charges and
discontinued operations.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THREE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------------------
ENTERPRISE GROUP
SMALL/MEDIUM (INCLUDING RECONCILING
BUSINESS GROUP CORPORATE COSTS) ITEMS TOTAL
-------------- ---------------- ----------- ---------
(IN THOUSANDS)

Revenues................................. $22,243 $ 9,512 $ -- $ 31,755
Income (loss), excluding non-cash
expenses, other non recurring items and
preferred stock dividends.............. 9,296 (17,302) -- (8,006)
Non-cash expenses, other non recurring
items and preferred stock dividends.... (884) (17,025) (215,734) (233,643)
Income (loss) attributable to common
shareholders........................... 8,412 (34,327) (215,734) (241,649)
Capital expenditures, including
capitalized software costs............. 152 1,084 -- 1,236
Segment assets........................... 62,017 173,340 -- 235,357

NINE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------------
ENTERPRISE GROUP
SMALL/MEDIUM (INCLUDING RECONCILING
BUSINESS GROUP CORPORATE COSTS) ITEMS TOTAL
-------------- ---------------- ----------- --------
(IN THOUSANDS)

Revenues.................................. $ 73,617 $ 27,881 $ -- $101,498
Loss, excluding non-cash expenses, other
non recurring items and preferred stock
dividends............................... (6,293) (53,725) -- (60,018)
Non-cash expenses, other non recurring
items and preferred stock dividends..... (58,903) (251,151) (269,605) (579,659)
Loss attributable to common
shareholders............................ (65,196) (304,876) (269,605) (639,677)
Capital expenditures, including
capitalized software costs.............. 9,095 5,664 -- 14,759
Segment assets............................ 62,017 173,340 -- 235,357

(8) COMMITMENTS AND CONTINGENCIES

In July 2000, we formed a Japanese joint venture, Verticalnet Japan, with
Softbank E-commerce Corp. Under the joint venture agreement, we have a maximum
obligation to contribute 800 million Yen to Verticalnet Japan, an equity method
investee. As of September 30, 2001, we had contributed approximately 400 million
Yen ($3.6 million as of the dates of the contributions). As of September 30,
2001, our remaining funding obligation to the joint venture through the first
two years of operations is approximately 400 million Yen (approximately $3.3
million as of September 30, 2001).

In June 2000, we formed Verticalnet Europe as a joint venture together with
Internet Capital Group, Inc. and British Telecommunications, plc. ("BT").
Immediately following formation, we owned 56% of Verticalnet Europe, which
operated industry marketplaces in the United Kingdom through one of its
subsidiaries. By March 2001, we owned 90% of the entity through the purchase of
the other partners' shares and Verticalnet Europe's redemption of a portion of
its own shares. We also entered into a put and call agreement with BT whereby we
can buy their remaining 10% interest in Verticalnet Europe at any time after
March 13, 2001 and BT may sell its investment to us at any time after March 13,
2002. The fair value of the put and call price of approximately $14.0 million is
included in other current liabilities on the consolidated balance sheet as of
September 30, 2001. The amount is payable in Euros, therefore, we mark the
liability to market quarterly. The variable component of the price based on the
LIBOR rate is accrued quarterly through the date the put or call is exercised.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) LITIGATION

On June 12, 2001, a class action lawsuit was filed against the Company and
several of its officers and directors in U.S. Federal Court for the Southern
District of New York in an action captioned CJA Acquisition, Inc. v.
Verticalnet, et al., C.A. No. 01-CV-5241 (the "CJA Action"). Also named as
defendants were four underwriters involved in the issuance and initial public
offering of 3.5 million shares of Verticalnet common stock in February
1999 -- Lehman Brothers Inc., Hambrecht & Quist LLC, Volpe Brown Whelan &
Company LLC and WIT Capital Corporation. The complaint in the CJA Action alleges
violations of Sections 11 and 15 of the Securities Act of 1933 and Section 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
based on, among other things, claims that the four underwriters awarded material
portions of the initial shares to certain favored customers in exchange for
excessive commissions. The plaintiff also asserts that the underwriters engaged
in a practice known as "laddering," whereby the clients or customers agreed that
in exchange for IPO shares they would purchase additional shares in the Company
at progressively higher prices after the IPO. With respect to the Company, the
complaint alleges that the Company and its officers and directors failed to
disclose in the Prospectus and the Registration Statement the existence of these
purported excessive commissions and laddering agreements.

After the CJA Action was filed, several "copycat" complaints were filed in
U.S. Federal Court for the Southern District of New York. Those complaints,
whose allegations mirror those found in the CJA Action, include Ezra Charitable
Trust v. Verticalnet, et al., C.A. No. 01-CV-5350; Kofsky v. Verticalnet, et
al., C.A. No. 01-CV-5628; Reeberg v. Verticalnet, C.A. No. 01-CV-5730; Lee v.
Verticalnet, et al., C.A. No. 01-CV-7385; and Hoang v. Verticalnet, et al., C.A.
No. 01-CV-6864. None of the complaints state the amount of any damages being
sought, but do ask the court to award "rescissory damages."

Verticalnet has retained counsel and intends to vigorously defend itself in
connection with the allegations raised in the CJA Action and the other
complaints. In addition, Verticalnet intends to enforce its indemnity rights
with respect to the underwriters who are also named as defendants in the
complaints.

On August 13, 2001, a lawsuit was filed against the Company in
Massachusetts Superior Court (Peter L. LeSaffre, Robert R. Benedict and R.W.
Electronics, Inc. v. NECX.com LLC and Verticalnet, Inc., C.A. No.
01-3724-B.L.S.). The suit alleges that, in connection with the Company's
acquisition of RWE in March 2000, certain Verticalnet and NECX officials made
representations about certain technologies that the companies would be using to
make them even more successful and profitable. As a result of the alleged
failure to use this technology, plaintiffs claim they only received $43.0
million on the sale of RWE, rather than the $78.0 million that they claim they
were entitled to.

The Company has retained counsel to defend against the lawsuit and filed a
motion to dismiss the action on October 12, 2001.

We are also party to various litigations and claims that arise in the
ordinary course of business. In the opinion of management, the ultimate
resolutions with respect to these actions will not have a materially adverse
effect on our financial position or results of operations.

(10) SUBSEQUENT EVENT

Stock Options

On October 1, 2001, we issued an aggregate grant of approximately 9.5
million stock options to our employees. These options vest semi-annually over a
two-year period.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information in this report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Any
statements contained in this report that are not statements of historical fact
may be deemed forward-looking statements. Words such as "may," "might," "will,"
"would," "should," "could," "project," "estimate," "pro forma," "predict,"
"potential," "strategy," "anticipate," "plan to," "believe," "continue,"
"intend," "expect" and words of similar expression (including the negative of
any of the foregoing) are intended to identify forward-looking statements.
Additionally, forward-looking statements in this report include statements
relating to trends in the usage of enterprise software and related services; the
design, development and acceptance of our products; the strategies underlying
our business objectives; the anticipated performance of the obligations of those
parties with which we have contractual relationships; the value of our
investments in other companies; our liquidity and capital resources; and the
impact of our acquisitions and investments on our business, financial condition
and operating results.

Our forward-looking statements are not meant to predict future events or
circumstances and may not be realized because they are based upon current
expectations that involve risks and uncertainties. Actual results and the timing
of certain events may differ materially from those currently expected as a
result of these risks and uncertainties. Factors that may cause or contribute to
a difference between the expected or desired results and actual results include,
but are not limited to, changes in our evolving business strategies and model;
our ability to eliminate redundancies within our business and to control
expenses; the availability of and terms of equity and debt financing to fund our
business; competition in our target markets; changes in economic conditions in
general and in our specific target markets; our ability to use and protect our
intellectual property; and our ability to attract and retain qualified
personnel, as well as the risks discussed in the section of this report entitled
"Factors Affecting our Business Condition." Given these uncertainties, investors
are cautioned not to place undue reliance on our forward-looking statements. We
disclaim any obligation to update these factors or to announce publicly the
results of any revisions to any of the forward-looking statements contained in
this report to reflect future events or developments.

The following discussion and analysis of our financial condition and
results of operations should be read together with the consolidated financial
statements and the related notes included elsewhere in this report.

OVERVIEW

Upon the closing of the sale of Verticalnet Exchanges ("NECX") to Converge
in January 2001, we continued to operate our two remaining segments, the
Small/Medium Business group and the Enterprise group, formerly referred to as
Verticalnet Markets and Verticalnet Solutions, respectively. In April 2001, we
announced our intention to consolidate our two business units into a single
operating segment in order to streamline operations and reduce redundant
positions and costs. Although we unified operations during the second quarter,
we continue to evaluate the financial performance of the Company based on our
two segments. These segments include the Small/Medium Business group, which
consists of the operations of our 59 industry marketplaces, including
e-enablement and e-commerce revenues and advertising and services revenues; and
the Enterprise group, which consists of our enterprise software, professional
services and related services operations.

During the first nine months of 2001, we announced and executed three major
restructuring efforts designed to reduce overall costs and streamline
operations. Our goals were to eliminate redundant positions and facilities
primarily related to previous acquisitions that had not been fully integrated,
to eliminate several unprofitable business initiatives and to improve our
operating efficiency and margins. Our cost cutting measures through the first
nine months of fiscal year 2001 included an aggregate work force reduction of
approximately 970 employees throughout the organization and various office
facility closures. We intend to continue to focus on balancing revenue growth
and achieving profitability and will continue to review our operations for
cost-cutting opportunities that will improve our operating margins. We expect to
continue to streamline our operations, including making additional headcount
reductions, if the revenues expected from our product and service offerings do
not materialize.

Verticalnet, through its subsidiaries, provides e-commerce solutions
targeted at distinct business segments. We deploy and provide enterprise
software solutions that enable organizations to achieve excellence in planning,
decision-making, and execution within their own organizations and across their
extended value chains. Additionally, through our Small/Medium Business group, we
operate 59 industry marketplaces that connect buyers and suppliers online by
providing industry-specific news and relevant product and service information.
Buyers are able to quickly locate and source products and services online while
suppliers are able to generate sales leads by showcasing their products and
services across our industry marketplaces and multiple third-party marketplaces
to reach highly qualified buyers and specifiers.

We generate revenue from three primary sources: e-enablement and
e-commerce; advertising and services; and software licensing and related
services. E-enablement and e-commerce, and advertising and services revenues are
generated by the Small/Medium Business group, whereas enterprise software
licensing and related services revenues are generated by the Enterprise group.

At September 30, 2001 we had an accumulated deficit of $1.0 billion. The
table below summarizes the loss from continuing operations attributable to
common shareholders (including preferred dividends) and the loss attributable to
common shareholders, which includes discontinued operations, during the
specified periods:

LOSS FROM
CONTINUING OPERATIONS
ATTRIBUTABLE TO LOSS ATTRIBUTABLE TO
COMMON COMMON
PERIOD SHAREHOLDERS SHAREHOLDERS
------ --------------------- --------------------
(IN MILLIONS)

Three months ended September 30, 2001........... $241.6 $241.6
Nine months ended September 30, 2001............ 635.8 639.7
Year ended December 31, 2000.................... 207.6 316.6
Year ended December 31, 1999.................... 52.6 53.5
Year ended December 31, 1998.................... 13.6 13.6
Year ended December 31, 1997.................... 4.8 4.8

The losses from continuing operations and accumulated deficit have resulted
primarily from our lack of revenues relative to the costs of our significant
infrastructure expansion, the costs related to acquisitions, including
amortization expense and in-process research and development charges,
restructuring and asset impairment charges and other costs incurred for the
development of our industry marketplaces and enterprise software products. We
expect to continue to incur significant operating losses for the foreseeable
future. Although we have experienced revenue growth in recent periods, such
growth may not be sustainable and should not be considered indicative of future
performance. We may never maintain or increase revenues or generate an operating
profit.

SALE OF VERTICALNET EXCHANGES (NECX)

On January 31, 2001, we completed the sale of our Verticalnet Exchanges
segment to Converge. Verticalnet Exchanges was comprised of NECX.com LLC, a
business purchased in December 1999, and its subsequent acquisitions of R.W.
Electronics, Inc. ("RWE") and F&G Capital, Inc. d/b/a American IC Exchange
("AICE"). In consideration for the sale to Converge, we received 10,371,319
shares of Series B convertible preferred stock and 1,094,751 shares of
non-voting common stock, representing approximately 18.0% and 1.9%,
respectively, of Converge's equity at the closing of the transaction. We were
also entitled to receive $60.0 million of cash at closing, subject to adjustment
based on a comparison of Verticalnet Exchanges' net worth and working capital as
of October 31, 2000 and as of the closing date. The final net worth and working
capital adjustment calculation performed in the second quarter of 2001,
following a post-closing audit, resulted in us making an aggregate payment of
$12.8 million to Converge. Approximately $6.5 million of the $12.8 million was
paid on January 31, 2001 as an estimated payment, $1.6 million was paid in June
2001 and the balance of $4.7 million was paid in July 2001.

We used the fair value of Verticalnet Exchanges of $215.0 million, as
determined by an independent appraisal, to record our investment in Converge.
The investment in Converge is being accounted for under the cost method of
accounting for investments (see Notes 2 and 3 to our Consolidated Financial
Statements).

The sale of Verticalnet Exchanges represented the disposal of a business
segment under Accounting Principles Board Opinion ("APB") No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Accordingly, results of this segment have been shown separately as
a discontinued operation, and all prior periods have been restated.

RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
AND SEPTEMBER 30, 2000

The following discussion and comparison regarding results of continuing
operations does not reflect the results of Verticalnet Exchanges.

Revenues. Revenues were $31.8 million for the three months ended September
30, 2001, including approximately $22.3 million from the Small/Medium Business
group and approximately $9.5 million from the Enterprise group. Revenues were
$34.5 million for the three months ended September 30, 2000, including
approximately $33.6 million from the Small/Medium Business group and
approximately $0.9 million from the Enterprise group. The decrease in
Small/Medium Business group revenues resulted primarily from a significant
decrease in our asset remarketing business as well as an overall decrease in
advertising and enablement revenues. The increase in Enterprise group revenues
resulted from an increase in software licensing and related services revenue,
primarily from our Converge contracts.

Our two largest sources of revenue during the three months ended September
30, 2001 were Microsoft and Converge. Revenues from Microsoft were approximately
$17.2 million, or 54.1% of total revenue, for the three months ended September
30, 2001 and approximately $9.5 million, or 27.6% of total revenue, for the
three months ended September 30, 2000. Revenues from Converge were approximately
$9.0 million, or 28.2% of total revenue, for the three months ended September
30, 2001. There was no revenue from Converge during the three months ended
September 30, 2000.

At September 30, 2001 and December 31, 2000, we had deferred revenues of
$53.5 million and $57.3 million, respectively. Our deferred revenue balance at
September 30, 2001 is composed of approximately $36.3 million from the
Small/Medium Business group, of which approximately $31.4 million relates to our
commercial arrangements with Microsoft, and approximately $17.2 million from the
Enterprise group, of which approximately $16.7 million relates to our agreements
with Converge.

Editorial and Operational Expenses. Editorial and operational expenses
consist primarily of salaries and benefits of operating and editorial personnel,
product costs (including costs of professional services provided to customers)
and other related operating costs. Editorial and operational expenses were $7.2
million for the three months ended September 30, 2001 and $15.8 million for the
three months ended September 30, 2000. Expenses decreased by:

- $2.9 million for salaries and benefits;

- $5.5 million for direct product costs, including costs of professional
services provided to our customers; and

- $0.2 million for other related operating costs.

Decreases in salaries and benefits were primarily attributable to
significant personnel reduction during 2001, especially related to our
Small/Medium Business group. Although we had increased product costs related to
professional services and consultants for the software business in 2001, there
was a significant decrease in product costs due to a decline in the sales
activity of our asset remarketing business. Our asset remarketing business,
considered part of the Small/Medium Business group, under certain circumstances
takes title to the goods being sold, therefore incurring direct product costs.

Product Development Expenses. Product development expenses consist
primarily of salaries and benefits, consulting expenses and related
expenditures. Product development expenses were $7.5 million for the three
months ended September 30, 2001 and $9.3 million for the three months ended
September 30, 2000. Expenses decreased by:

- $0.7 million for salaries and benefits; and

- $1.1 million for consulting expenses.

This decrease in product development expenses resulted primarily from our
efforts to reduce the use of external consultants and third party software
providers in our development efforts. Product development is critical to
attaining our goals; however, we do not expect significant increases in these
costs.

Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and commissions for sales and marketing personnel,
advertising, and travel and entertainment, including the costs of attending
trade shows. Sales and marketing expenses were $11.2 million for the three
months ended September 30, 2001 and $20.9 million for the three months ended
September 30, 2000. Expenses decreased by:

- $2.9 million for salaries, commissions and benefits;

- $5.7 million for advertising, including barter expense; and

- $1.1 million for travel and entertainment expenses (including trade show
attendance) and other expenses.

This decrease resulted primarily from our reduction of sales and marketing
personnel, especially in relation to the Small/Medium Business group, and our
overall cost cutting efforts, which reduced our marketing and advertising spend.

General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for our executive,
administrative, finance, legal, human resources and business and corporate
development personnel, as well as support services and professional service
fees. General and administrative expenses were $11.8 million for the three
months ended September 30, 2001 and $19.5 million (including $1.5 million of
deferred compensation expense) for the three months ended September 30, 2000.
Expenses increased (decreased) by:

- $(7.5) million for salaries and benefits;

- $(0.6) million for professional fees;

- $0.2 million for facility costs; and

- $0.2 million for other general and administrative costs.

This net decrease resulted primarily because personnel and related expenses
in the third quarter of 2000 included bonus and stock compensation costs of
approximately $5.5 million incurred for our former CEO, of which approximately
$3.8 million was recorded as a reduction to expense in the fourth quarter of
2000 upon the former CEO's resignation.

Amortization Expense. Amortization expense primarily reflects the
amortization of goodwill from purchase business combinations. Also included in
amortization expense is the amortization of identified intangible assets
acquired in such acquisitions and the amortization of deferred costs related to
the warrants and Series A preferred stock issued to Microsoft. The amortization
period for goodwill is 36 months, while the amortization period for other
intangible assets ranges from 24 to 36 months. Amortization expense was $19.0
million and $42.1 million (including $1.1 million and $0.6 million of deferred
cost amortization related to Microsoft) for the three months ended September 30,
2001 and September 30, 2000, respectively. Amortization expense decreased due to
goodwill and other intangible asset impairments recorded in the second quarter
of 2001.

Restructuring and Asset Impairment Charges. During the three months ended
September 30, 2001, we recorded a $15.0 million charge related to employee
terminations, facility closures and asset write-downs (see Note 5 to our
consolidated financial statements).

Other Income and Expenses. Other income (expense) includes the following:

THREE MONTHS
ENDED
SEPTEMBER 30,
---------------
2001 2000
------- -----
(IN MILLIONS)

Write-down related to cost method and equity method
investments(1)............................................ $(197.8) $(1.0)
Equity in loss of affiliates................................ (0.5) (1.1)
Other income (expense) items................................ (1.1) -
------- -----
$(199.4) $(2.1)
======= =====

---------------
(1) This write-down includes a $195.4 million impairment to our cost method
investment in Converge (see Note 3 to our consolidated financial
statements).

Interest Income (Expense), Net. Interest income (expense), net includes
income from temporarily invested cash and cash equivalents and from investments
and expenses related to our financing obligations. Net interest expense was $0.4
million (net of $0.7 million of income) for the three months ended September 30,
2001 and net interest income was $0.7 million (net of $0.8 million of expense),
for the three months ended September 30, 2000. Interest income decreased as a
result of a lower cash balance in 2001. We invest the majority of our cash
balances in debt instruments of the United States Government and its agencies,
and in high-quality corporate issuers. Interest expense increased during the
period due to the amortization of our Ariba forward sale transaction cost and
interest accrued on our put and call arrangement with BT (see Notes 1 and 8 to
our consolidated financial statements).

Preferred Stock Dividends. For the three months ended September 30, 2001,
preferred stock dividends and accretion were approximately $1.9 million. As of
September 30, 2001, cumulative dividends of $9.3 million have been earned by
Microsoft, the holder of our Series A preferred stock. Through September 30,
2001, dividends of $7.7 million were paid to Microsoft through the issuance of
additional shares of our Series A preferred stock. The remaining $1.6 million
remains payable as of September 30, 2001. The dividends may be paid in cash,
additional shares of Series A preferred stock or common stock, at our option.

RESULTS OF CONTINUING OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
AND SEPTEMBER 30, 2000

The following discussion and comparison regarding results of continuing
operations does not reflect the results of Verticalnet Exchanges.

Revenues. Revenues were $101.5 million for the nine months ended September
30, 2001, including approximately $73.6 million from the Small/Medium Business
group and approximately $27.9 million from the Enterprise group. Revenues were
$71.8 million for the nine months ended September 30, 2000, including
approximately $70.0 million from the Small/Medium Business group and
approximately $1.8 million from the Enterprise group. Although the Small/Medium
Business group revenues remained fairly consistent year over year due to
increased e-enablement revenues (storefronts, e-commerce centers and marketplace
managers) from our Original and New Microsoft Agreements (see Note 4 to our
consolidated financial statements), we have recently experienced a significant
decline in new advertising and e-enablement revenues. Additionally, revenues
from various horizontal businesses have declined, such as our education and
training business, which was eliminated earlier this year as part of our cost
reduction effort, as well as our asset remarketing business, which has
experienced difficulty sustaining revenues in the current economic environment.
The increase in the Enterprise group revenues resulted from an increase in
software licensing and related services, primarily from our Converge contracts.

Our two largest sources of revenue during the nine months ended September
30, 2001 were Microsoft and Converge. Revenues from Microsoft were approximately
$45.7 million, or 45.0% of total revenue, for the nine months ended September
30, 2001 and approximately $18.0 million, or 25.1% of total revenue, for the
nine months ended September 30, 2000. Revenues from Converge were approximately
$23.7 million, or 23.4% of

total revenue, for the nine months ended September 30, 2001. There was no
revenue from Converge during the nine months ended September 30, 2000.

At September 30, 2001 and December 31, 2000, we had deferred revenues of
$53.5 million and $57.3 million, respectively. Our deferred revenue balance at
September 30, 2001 is composed of approximately $36.3 million from the
Small/Medium Business group, of which approximately $31.4 million relates to our
Original and New Microsoft Agreements, and approximately $17.2 million from the
Enterprise group, of which approximately $16.7 million relates to our agreements
with Converge.

Editorial and Operational Expenses. Editorial and operational expenses
were $33.6 million for the nine months ended September 30, 2001 and $28.7
million for the nine months ended September 30, 2000. Expenses increased
(decreased) by:

- $(0.6) million for salaries and benefits;

- $4.2 million for direct product costs, including costs of professional
services provided to our customers; and

- $1.3 million for other related operating costs.

The net increase was primarily attributable to increased direct product
costs especially in relation to increased professional services for our software
customers.

Product Development Expenses. Product development expenses were $24.1
million for the nine months ended September 30, 2001 and $22.4 million for the
nine months ended September 30, 2000. Expenses increased (decreased) by:

- $2.4 million for salaries and benefits; and

- $(0.7) million for consulting and other related expenditures.

This net increase in product development expenses resulted primarily from
increased staffing during the first quarter of 2001. Staffing was subsequently
reduced in our second and third quarter restructurings in order to eliminate
redundant positions and streamline our development processes.

Sales and Marketing Expenses. Sales and marketing expenses were $58.8
million for the nine months ended September 30, 2001 and $54.8 million for the
nine months ended September 30, 2000. Expenses increased (decreased) by:

- $(0.9) million for advertising, including barter expense;

- $2.6 million for salaries, commissions and benefits; and

- $2.3 million for other expenditures.

This net increase resulted primarily from an increased number of sales and
marketing personnel across our business units during the beginning of fiscal
year 2001.

General and Administrative Expenses. General and administrative expenses
were $44.0 million for the nine months ended September 30, 2001 and $36.7
million (including $1.5 million of deferred compensation expense) for the nine
months ended September 30, 2000. Expenses increased (decreased) by:

- $(3.2) million for salaries and benefits;

- $(1.3) million for professional fees;

- $2.7 million for facility costs; and

- $9.1 million for other general and administrative costs.

This net increase resulted primarily from higher facility costs, including
those incurred as a result of newly acquired businesses.

Amortization Expense. Amortization expense was $108.1 million and $97.7
million (including $2.7 million and $1.1 million of deferred cost amortization
related to Microsoft) for the nine months ended September 30, 2001 and September
30, 2000, respectively. The increase in amortization expense is primarily
attributable to our acquisition of Tradeum in March 2000. Amortization expense
is expected to decrease due to goodwill and other intangible asset impairments
recorded in the second quarter of 2001.

Restructuring and Asset Impairment Charges. During the nine months ended
September 30, 2001, we recorded a $241.4 million charge related to employee
terminations, facility closures and asset write-downs (see Note 5 to our
consolidated financial statements).

Other Income and Expenses. Other income (expense) includes the following:

NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2001 2000
------- ------
(IN MILLIONS)

Net gain (loss) on investments(1)........................... $ (2.2) $ 79.9
Write-down related to cost method, equity method and
available-for-sale investments(2)......................... (218.6) (1.0)
Equity in loss of affiliates................................ (2.3) (1.2)
Conversion payment to debtholders(3)........................ - (11.2)
Other income (expense) items................................ .7 -
------- ------
$(222.4) $ 66.5
======= ======

---------------
(1) We acquired $1.0 million of equity in Tradex Technologies Inc. ("Tradex") in
July 1999. In March 2000, Tradex was acquired by Ariba, Inc. ("Ariba") and
we received 566,306 shares of Ariba, of which 64,310 shares were placed in
escrow for one year subsequent to the transaction closing, in exchange for
our shares of Tradex. We recorded an $85.5 million gain upon the receipt of
the Ariba common stock and subsequently sold 140,000 shares in March 2000 at
a loss of $5.6 million, resulting in a net investment gain of $79.9 million.
In March 2001, 49,982 of our escrowed Ariba shares were released, with the
remaining 14,328 shares being held in escrow pending the resolution of a
dispute under the Agreement and Plan of Reorganization. In light of the
continued uncertainty around whether the Ariba shares remaining in escrow
will eventually be released to us, we recorded a $2.2 million loss on
investment during the three months ended March 31, 2001 to adjust the
original investment gain we recorded when the transaction closed. To the
extent the pending dispute is resolved in whole or in part in Tradex's
favor, we will subsequently record an additional adjustment.

(2) This write-down includes a $195.4 million impairment to our cost method
investment in Converge (see Note 3 to our consolidated financial
statements).

(3) In April 2000, approximately $93.3 million of our 5 1/4% convertible
subordinated debentures were converted into 4,664,750 shares of our common
stock. In connection with the conversion, we made an inducement payment of
approximately $11.2 million to our debtholders.

In-Process Research and Development Charge. In March 2000, we incurred a
one-time in-process research and development charge of $10.0 million in
connection with our acquisition of Tradeum.

Interest Income (Expense), Net. Net interest income was $0.6 million and
$1.6 million (net of $2.9 million and $2.9 million of expense) for the nine
months ended September 30, 2001 and 2000, respectively. Interest income
decreased as a result of a lower cash balance in 2001. Interest expense
decreased during the period due to the conversion of a portion of our
outstanding convertible debt during April 2000.

Preferred Stock Dividends. For the nine months ended September 30, 2001,
preferred stock dividends and accretion were approximately $5.5 million. As of
September 30, 2001, cumulative dividends of $9.3 million have been earned by
Microsoft, the holder of our Series A preferred stock. Through September 30,
2001, dividends of $7.7 million were paid to Microsoft through the issuance of
additional shares of our

Series A preferred stock. The remaining $1.6 million remains payable as of
September 30, 2001. The dividends may be paid in cash, additional shares of
Series A preferred stock or common stock, at our option.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2001, our primary source of liquidity consisted of cash
and cash equivalents. We intend to make the majority of such funds readily
available for operating purposes. At September 30, 2001, we had cash and cash
equivalents and short-term investments totaling $52.9 million, compared to
$145.2 million at December 31, 2000. At September 30, 2001 we had negative
working capital of $26.8 million.

Net cash used in operating activities was $71.3 million for the nine months
ended September 30, 2001. Net cash used in operating activities consisted of net
operating losses and a decrease in accrued expenses and accounts payable, offset
by decreases in accounts receivable and prepaid expenses and other assets.

Net cash used in investing activities was $13.9 million for the nine months
ended September 30, 2001. Cash from investing activities include $21.0 million
for the sale and maturities of available-for-sale securities, $0.4 million for
the sale of assets and $7.0 million for the release of previously restricted
funds. Cash used in investing activities included capital expenditures and
capitalized software costs of $14.7 million, acquisitions net of cash acquired
of $24.6 million, and investments made in companies accounted for under the
equity or cost method, net of cash received from liquidation, of $3.0 million.
The capital expenditures consisted primarily of the purchase of office
furniture, computer hardware and communications equipment. We have generally
funded our capital expenditures through funds generated from operations and the
use of capital leases and expect to continue to do so in the foreseeable future.

Net cash provided by financing activities was $14.0 million for the nine
months ended September 30, 2001. Net cash provided by financing activities
consists of net proceeds from the issuance of common stock to Sumitomo of $15.0
million and net proceeds from the exercise of employee stock options and stock
purchase plan transactions of $1.1 million. Cash used in financing activities
includes payments of $2.1 million made for capital leases. Due to current market
conditions, proceeds from the exercise of employee stock options and stock
purchase plan transactions are not expected to increase.

In July 2000, we formed a Japanese joint venture, Verticalnet Japan, with
Softbank E-commerce Corp. As of September 30, 2001, we have made contributions
of approximately $3.6 million. Our remaining maximum funding obligation is
approximately 400 million Yen (approximately $3.3 million as of September 30,
2001) to the joint venture through its first two years of operations.

We operate in an industry that is rapidly evolving and extremely
competitive. Recently, many Internet based businesses, including some within the
business-to-business e-commerce industry, have experienced difficulty in raising
capital necessary to fund operating losses and ongoing investments in strategic
relationships. Valuations of public companies operating in the Internet
business-to-business e-commerce sector have declined significantly since the
first quarter of 2000. During the year ended December 31, 1999 and in the first
quarter of 2000, we announced several acquisitions, the most significant of
which was Tradeum, that were financed principally with shares of our common
stock and valued based on the price of our common stock at that time. In the
second quarter of fiscal 2001 we recorded a $155.0 million impairment charge to
reduce

goodwill and other intangible assets associated with our Tradeum acquisition to
their estimated fair value. Additionally, we recorded a $47.1 million impairment
charge in the second quarter of fiscal 2001 to write off goodwill and other
intangible assets associated with various acquisitions related to our
Small/Medium Business group, including approximately $20.6 million related to
our acquisition of Verticalnet Europe. Although we took significant impairment
charges in the second quarter of 2001, it is reasonably possible that our
accounting estimates with respect to the useful life and ultimate recoverability
of goodwill and other intangible assets could change in the near term and that
the effect of such changes on the consolidated financial statements could be
material (see Note 5 to our consolidated financial statements).

Although we have taken significant measures to reduce operating costs, we
expect to continue using cash resources to fund operating losses, acquisitions,
strategic investments, technologies and the infrastructure necessary to support
our business initiatives. Although, based on our most recent projections, we
believe our current level of liquid assets and the expected cash flows from
contractual arrangements will be sufficient to finance our capital requirements
and anticipated operating losses for at least the next 12 months, any projection
of future long-term cash needs and cash flows are inherently subject to
substantial uncertainty. To the extent our current level of liquid assets proves
to be insufficient, we may need to obtain additional debt or equity financing or
sell or eliminate some of our product lines. In the event that we seek to raise
additional capital from the sale of additional equity or convertible debt
securities, our shareholders would experience further dilution. Furthermore,
these new securities may have rights, preferences and privileges senior to those
of our existing common and preferred shareholders. In addition, we cannot be
certain that additional financing will be available to us on favorable terms
when required or if at all.

The amended and restated subscription licensing agreement and maintenance
and support agreement signed on October 9, 2001 with Converge provides for us to
receive an aggregate of $22.0 million prior to May 2, 2002 under the amended and
restated subscription license agreement and an additional $4.5 million during
the term of the agreement which expires on March 30, 2003 for maintenance and
support. Our receipt of the aggregate payments of $26.5 million under the
amended and restated subscription licensing agreement and the maintenance and
support agreement would replace all outstanding payments under the original
subscription license agreement and professional services agreements, for which,
as of September 30, 2001, we had received approximately $39.3 million of the
$108.0 million (see Note 4 to our consolidated financial statements). Currently,
a significant portion of our cash flow requirements will be met through these
agreements with Converge. A failure by Converge to make all or part of these
payments on a timely basis, including any restructuring of these payments
(whether in terms of amount, timing or otherwise) could have a material adverse
effect on our business, financial condition and operating results. Under the New
Microsoft Agreement signed on April 26, 2001, Microsoft prepaid to us $40.0
million for the upsell or deployment of enablement products on their behalf
through April 2002. The $40.0 million payment to us under the New Microsoft
Agreement replaced the net cash flows of approximately $49.2 million in 2001 and
$5.1 million in 2002 that we expected to receive under the Original Microsoft
Agreement (net of cash payments that we were required to make to Microsoft) as
previously reported in Note 9 to our consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2000.

ACQUISITIONS

We may continue to pursue acquisitions that complement our existing
products and services. We evaluate prospective acquisitions by assessing whether
the business or asset broadens the scope of services we offer, enhances our
presence in existing or new markets, offers technology that would allow us to
better serve our clients, or offers the opportunity to enhance profitability.

RECENT ACCOUNTING PRONOUNCEMENTS

Emerging Issues Task Force ("EITF") Issue No. 00-21, Accounting for
Multiple-Element Revenue Arrangements, is currently being discussed by the EITF.
Issues being addressed by an EITF working group include determining when
elements of multiple-element arrangements should be evaluated separately and
allocating consideration to the individual elements. We are closely monitoring
the EITF's discussions on this issue. We do not anticipate changes in our
historical accounting policies, however, there can be no assurance
29

that the final consensus and guidance ultimately issued by the EITF on this
issue will not impact us in the future.

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001. SFAS No. 141 also
specifies criteria that must be met for intangible assets acquired in a purchase
method business combination to be recognized and reported separately from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142, which will be effective January
1, 2002, requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and the accounting and reporting provisions of APB No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS No. 144 retains
the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how
a long-lived asset that is used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held for sale,
and prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on
how to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142.

FACTORS AFFECTING OUR BUSINESS CONDITION

OUR LIMITED OPERATING HISTORY AND EVOLVING REVENUE MODEL MAKE IT DIFFICULT TO
PREDICT OUR FUTURE OPERATING RESULTS AND EVALUATE OUR FUTURE PROSPECTS.

Our relatively limited operating history, together with our evolving
revenue model and rapid changes in our target markets, makes predicting our
future operating results and evaluating our future prospects very difficult. For
the three months ended September 30, 2001, approximately 70% of our overall
revenues were generated primarily from sales of storefronts, marketplace
managers and advertising on our industry
30

marketplaces. In the foreseeable future, we expect to continue generating a
significant percentage of our overall revenues from these sources, while
generating additional revenues from enterprise software licensing and related
services. We may not be able to sustain our current revenues or generate
additional revenues as expected. If we do not sustain our current revenues or
generate additional revenues in each of our current revenue streams, our
business, financial condition and operating results will suffer.

WE MAY NOT HAVE SUFFICIENT CASH FLOW FROM OPERATIONS TO SERVICE OUR DEBT.

As of September 30, 2001, we had approximately $22.4 million in long-term
debt (including $21.7 million of our outstanding 5 1/4% convertible subordinated
debentures due 2004). Currently, we are not generating sufficient cash flow from
our operations to satisfy our annual debt service payment obligations. If we are
unable to satisfy our debt service requirements, substantial liquidity problems
could result, which would negatively impact our future prospects.

WE MAY REQUIRE ADDITIONAL CAPITAL FOR OUR OPERATIONS, WHICH WE MAY NOT BE ABLE
TO RAISE OR, EVEN IF WE DO, COULD HAVE DILUTIVE AND OTHER NEGATIVE EFFECTS ON
OUR SHAREHOLDERS.

Although, based on our most recent projections, we believe our current
level of liquid assets and the expected cash flows from contractual arrangements
will be sufficient to finance our capital requirements and anticipated operating
losses for at least the next 12 months, any projection of future long-term cash
needs and cash flows are inherently subject to substantial uncertainty. There is
no assurance that these resources will be sufficient for anticipated or
unanticipated working capital and capital expenditure requirements during this
period. We may need, or find it advantageous, to raise additional funds in the
future to fund our growth, pursue sales and licensing opportunities, develop new
or enhanced products and services, respond to competitive pressures or acquire
complementary businesses, technologies or services.

If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our shareholders will be reduced
and shareholders will experience additional dilution. These new securities may
also have powers, preferences and rights that are senior to those of the rights
of our common stock. We cannot be certain that additional financing will be
available on terms favorable to us, if at all. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
operations adequately, promote our brand identity, take advantage of acquisition
opportunities, develop or enhance products or services or respond to competitive
pressures. Any inability to do so could have a negative effect on our business,
financial condition and results of operations.

WE MAY NEVER GENERATE OPERATING PROFIT.

As of September 30, 2001, our accumulated deficit was $1.0 billion. For the
nine months ended September 30, 2001, we sustained a $639.7 million loss
attributable to common shareholders (including preferred stock dividends). We
expect to incur operating losses for the foreseeable future. We may never
generate an operating profit or, even if we do become profitable from operations
at some point, we may be unable to sustain that profitability.

WE MAY NOT DEVELOP SIGNIFICANT REVENUES FROM ENTERPRISE SOFTWARE LICENSING AND
RELATED SERVICES, WHICH COULD ADVERSELY AFFECT OUR FUTURE REVENUE GROWTH AND
ABILITY TO ACHIEVE PROFITABILITY.

One of the many challenges we face in growing future revenues and achieving
profitability is successfully refocusing our efforts on developing, enhancing
and promoting our enterprise software solutions and related services. If we do
not generate significant additional revenues from enterprise software licensing
and related services, our business, financial condition and operating results
will be impaired. Our ability to generate additional revenues depends on the
overall demand for enterprise software solutions and related services, as well
as general economic and business conditions. Suppressed demand for software
solutions and related services caused by a weakening economy may result in less
revenue growth than expected or even a decline in revenues. We cannot offer any
assurances that we will be able to develop, enhance or promote our enterprise

software solutions and related services effectively, whether as a result of
general economic conditions or otherwise.

IF WE CANNOT FURTHER REDUCE OUR EXPENSES, OUR OPERATING RESULTS WILL SUFFER.

Our limited operating history and our evolving revenue model make it
difficult to predict our future operating expenses. If we cannot further reduce
our expenses, our operating results will suffer. Some of our expenses are fixed,
including those related to non-cancelable agreements, equipment leases and real
estate leases. We have undertaken restructuring initiatives in the first, second
and third quarters of 2001 in part to reduce operating expenses. These
reductions in force may not sufficiently reduce our operating expenses to a
level necessary to achieve an operating profit. In addition, we may not be
successful in further identifying and eliminating redundancies within our
business, or in streamlining our overall operations as necessary to reduce our
expenses.

FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.

Our quarterly operating results are difficult to forecast and could vary
significantly. We believe that period-to-period comparisons of our operating
results are not meaningful and should not be relied on as indicators of future
performance. If our operating results in a future quarter or quarters do not
meet the expectations of securities analysts or investors, the price of our
common stock may fall.

We expect that our quarterly operating results will fluctuate significantly
due to various factors, many of which are beyond our control, including:

- anticipated lengthy sales cycles for our products;

- the size and timing of individual license transactions;

- intense and increased competition in our target markets;

- our ability to develop, introduce and bring to market new products and
services, or enhancements to our existing products and services, on a
timely basis;

- the level of demand for our products and services; and

- risks associated with past and future acquisitions.

If we generate additional revenues from enterprise software licensing and
related services as intended, our quarterly operating results will be
substantially dependent on orders booked and shipped in that quarter. Any delay
in the recognition of revenue for any of our license transactions could likewise
cause significant variations in our quarterly operating results and could cause
our revenues to fall significantly short of anticipated levels.

In the course of our business, we may acquire securities of privately-held
companies with whom we form strategic relationships. Our quarterly operating
results may also fluctuate significantly due to accounting rules governing the
treatment of these securities. Specifically, before the market value of these
securities becomes readily determinable as a result of being tradable in a
public market, they are carried on our consolidated balance sheet at cost.
However, if these non-public securities become salable in the public market as a
result of a transaction in which such securities are exchanged for public
securities, accounting rules require us to record a non-operating gain or loss
equal to the difference between our cost and the market value of the public
securities received, regardless of whether we sell or retain the securities. Our
holdings in public securities are then marked to market at the end of each
quarter. If the market value of an equity security we own becomes readily
determinable and we sell that security, we will realize a gain or loss on the
transaction. These nonrecurring gains or losses may occur from time to time and
could cause significant fluctuations in our quarterly results. Similarly, our
quarterly results may also fluctuate if we determine that a decline in the fair
value of one of our equity positions is other than temporary, which would
require us to write down or write off the carrying value of those securities.
During the nine months ended September 30, 2001, we recorded an aggregate of
$218.6 million in impairment charges for other than temporary declines in the
fair value of several

of our cost method, equity method and available-for-sale investments, $195.4
million of which related to our investment in Converge.

IF OUR STRATEGIC RELATIONSHIP WITH CONVERGE DOES NOT PROVIDE THE BENEFITS WE
EXPECT, OUR BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED.

If we are ultimately unable, for any reason, to realize the expected
benefits from our strategic relationship with Converge, our business, financial
condition and results of operations will be materially and adversely affected.
We believe this relationship offers validation of our business strategy and
opportunities to generate additional revenues in our enterprise software
business. In particular, we believe the Converge relationship provides a
concrete and visible example of the value of some of our software products.
However, we may never generate significant additional revenues or realize any of
the other benefits expected from this relationship. If we fail to enter into
additional material software licensing transactions, our financial condition and
operating results will be adversely affected.

Currently, a significant portion of our future cash flow requirements are
expected to be met through scheduled payments from Converge. A failure by
Converge to make all or a part of these payments on a timely basis, including
any restructuring of these payments (whether in terms of amount, timing or
otherwise) could have a material negative effect on our ability to meet our cash
flow requirements.

WE ANTICIPATE LENGTHY SALES AND IMPLEMENTATION CYCLES FOR OUR SOFTWARE
OFFERINGS.

We anticipate our sales cycles for our enterprise software offerings to
average approximately six to nine months. In selling our products, we may be
asking potential customers in many cases to change their established business
practices and conduct business in new ways. In addition, potential customers
must generally consider additional issues, such as product benefits, ease of
installation, ability to work with existing technology, functionality and
reliability, before committing to purchase our products. Additionally, we
believe that the purchase of our products is often discretionary and generally
involves a significant commitment of capital and other resources by a customer,
which frequently requires approval at a number of management levels within the
customer organization. Likewise, the implementation and deployment of our
enterprise software products requires a significant commitment of resources by
our customers and our professional services organization. The challenges we face
in attempting to obtain commitments and approvals from our customers may be
exacerbated by worsening economic conditions in general and in our target
markets, as well as by competition from other software solution providers whose
brands, products and services may be better known to, and more widely accepted
by, potential customers than ours.

WE EXPECT TO RELY ON THIRD PARTIES TO IMPLEMENT OUR PRODUCTS.

We expect to rely increasingly on third parties to implement our products
at customer sites. If we are unable to establish and maintain effective,
long-term relationships with implementation providers, or if these providers do
not meet the needs or expectations of our customers, our business could be
seriously harmed. As a result of the limited resources and capacities of many
third-party implementation providers, we may be unable to establish or maintain
relationships with third parties having sufficient resources to provide the
necessary implementation services to support our needs. If these resources are
unavailable, we will be required to provide these services internally, which
could significantly limit our ability to meet our customers' implementation
needs. A number of our competitors have significantly more well-established
relationships with third parties that we may potentially partner with. As a
result, these third parties may be more likely to recommend competitors'
products and services rather than our own. In addition, we would not be able to
control the level and quality of service provided by our implementation
partners.

NEW VERSIONS AND RELEASES OF OUR PRODUCTS MAY CONTAIN ERRORS OR DEFECTS.

Our enterprise software products may contain undetected errors or failures
when first introduced or as new versions are released. This may result in loss
of, or delay in, market acceptance of our products. Errors in new releases and
new products after their introduction could result in delays in release, lost
revenues and

customer frustration during the period required to correct these errors. We may
in the future discover errors and defects in new releases or new products after
they are shipped or released.

OUR TARGET MARKETS ARE EVOLVING AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE,
WHICH WE MAY NOT BE ABLE TO KEEP PACE WITH.

The markets for our products and services are evolving and characterized by
rapid technological change, changing customer needs, evolving industry standards
and frequent new product and service announcements. The introduction of products
employing new technologies and emerging industry standards could render our
existing products or services obsolete or unmarketable. If we are unable to
respond to these developments successfully or do not respond in a cost-effective
way, our business, financial condition and operating results will suffer. To be
successful, we must continually improve and enhance the responsiveness, services
and features of our marketplace products and enterprise software products and
introduce and deliver new product and service offerings and new releases of
existing products. We may fail to improve or enhance our marketplace products
and enterprise software products or introduce and deliver new releases or new
offerings on a timely and cost-effective basis or at all. If we experience
delays in the future with respect to our industry marketplaces or enterprise
software products, or if our improvements, enhancements, offerings or releases
to these products do not achieve market acceptance, we could experience a delay
or loss of revenues and customer dissatisfaction. Our success will also depend
in part on our ability to acquire or license third party technologies useful in
our business, which we may not be able to do.

WE MAY ULTIMATELY BE UNABLE TO COMPETE IN THE MARKETS FOR THE PRODUCTS AND
SERVICES WE OFFER.

The markets for our products and services are intensely competitive.
Increased competition may result in reduced margins and loss of market share,
either of which could seriously harm our business. We expect the intensity of
competition in our target markets to increase as the amount of e-commerce
transacted over the Internet grows, current competitors expand their product and
service offerings and new competitors enter the market.

Examples of increased competition we expect to face include the following:

- Several companies offer competitive industry marketplaces and supplier
enablement applications. Additional companies may offer competing
industry marketplaces on a standalone or portfolio basis. Our
Small/Medium Business group also competes for a share of a customer's
advertising budget with online services and traditional offline media,
such as print publications and trade associations.

- Our enterprise software products and services face competition from
software companies whose products or services compete with a particular
aspect of the solution we provide, as well as several major enterprise
software developers.

Many of our competitors have longer operating histories, greater brand
recognition and greater financial, technical, marketing and other resources than
we do, and may have well-established relationships with our existing and
prospective customers. This may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives. Our competitors may also develop
products or services that are superior to, or have greater market acceptance
than, ours. If we are unable to compete successfully against our competitors,
our business, financial condition and operating results would be negatively
impacted.

WE MAY NOT REALIZE ANY RETURN ON, AND MAY EVEN SUFFER A COMPLETE LOSS OF, OUR
EQUITY INTERESTS IN CONVERGE AND OUR STRATEGIC PARTNERS.

The sale of Verticalnet Exchanges to Converge in exchange for, among other
things, equity in Converge made us the largest stockholder in Converge. In the
quarter ended September 30, 2001, Converge undertook a strategic restructuring
of its operations, which ultimately resulted in us taking a $195.4 million
impairment charge to our investment in Converge. In addition to our equity
ownership of Converge, we also have equity interests in other companies. We may
never realize any return on our equity interests in Converge or these

other entities. In fact, we may suffer a complete loss of these equity
interests, which would materially and adversely affect our business, financial
condition and operating results. Our ability to realize a return on any of these
equity positions is far from certain, given that these companies have limited
financial and other resources, yet are subject to many of the same risks and
uncertainties that we face in our business, including limited operating
histories, evolving revenue models and uncertain market acceptance of their
products and services. Moreover, we are often unable to require terms and
conditions related to equity interests in our strategic partners (e.g., board
membership or observer rights) that are particularly favorable to us vis-a-vis
other investors.

ACQUISITIONS MAY NEGATIVELY IMPACT OUR BUSINESS.

We have grown, and may continue to grow, our business through acquisitions
that complement our existing products and services. If we are unable to complete
future acquisitions, our business, financial condition and operating results
could be negatively impacted. We may not be able to identify additional suitable
businesses that are available for sale at reasonable prices or on reasonable
terms. Even if we are able to identify appropriate acquisition candidates, we
may not be able to negotiate the terms of any acquisition successfully, finance
the acquisition or integrate the acquired business (including its products,
services, technologies or personnel) into our existing business operations.

Our acquisition strategy is also subject to numerous other risks including,
without limitation, the following:

- acquisitions may cause a disruption in our ongoing business, distract our
management and other resources and make it difficult to maintain our
standards, controls and procedures;

- we may acquire companies in markets in which we have little experience;

- we may not be able to retain key employees from acquired companies or
from our own company after the acquisition, and may face competition from
employees that leave before or after an acquisition is complete;

- to pay for acquisitions, we may be required to issue equity securities,
which may be dilutive to existing shareholders, or we may be required to
incur debt or spend cash, which would negatively impact our liquidity and
could impair our ability to fund our operations;

- we may not realize any return on our investment in the acquired companies
and may even lose our entire investment and incur significant additional
losses;

- our share price could decline following market reaction to our
acquisitions; and

- our interest deductions may be disallowed for federal income tax
purposes.

IF OUR ADVERTISING REVENUES DECLINE, OUR BUSINESS WOULD SUFFER.

We currently rely on revenues generated from the sale of advertising on our
industry marketplaces for a material portion of our revenues. If we are not able
to increase or even maintain our current level of advertising revenues, our
business may suffer. Our ability to increase or maintain our advertising
revenues depends on many factors, including, without limitation:

- general economic conditions and their impact on demand for online
advertising;

- acceptance of the Internet as a legitimate, effective and measurable
medium for business advertising and e-commerce;

- the development of a large base of users on our industry marketplaces who
possess demographic characteristics attractive to advertisers;

- changes in industry pricing practices for advertising;

- the evolving focus of our sales and marketing efforts; and

- our ability to build and maintain relationships with third-party
advertisement delivery services and technology providers.

Other factors could also adversely affect our advertising revenues and,
thus, impair our business, financial condition and operating results. For
example, widespread use of "filter" software programs that limit access to our
storefronts and other hosted solutions from the Internet user's browser could
deter companies from advertising on the Internet. Additionally, no standards
have been widely accepted to measure the effectiveness of Internet advertising.
If such standards do not develop, companies may not continue their current
levels of Internet advertising, or if they are not currently advertising on the
Internet, they may be reluctant to do so.

For some of our customers, we provide extended payment terms over the
length of the contract, rather than collecting the entire payment up front. To
the extent that these amounts are not collected, our advertising revenues, bad
debt expense and cash flows may be negatively impacted. We also have barter
arrangements where we provide banner advertisements, storefronts and newsletter
sponsorships to some of our customers in exchange for advertising on their Web
sites or in their publications. If our barter arrangements do not continue, our
advertising revenues may decline. For the nine months ended September 30, 2001,
approximately $6.3 million, or 6.2%, of our reported revenue, was generated by
barter advertising arrangements.

THE CONTENT ON OUR INDUSTRY MARKETPLACES MAY NOT ATTRACT A SIGNIFICANT NUMBER OF
USERS WITH DEMOGRAPHIC CHARACTERISTICS VALUABLE TO ADVERTISERS.

Our future success depends in part upon our ability to deliver compelling
business content on our industry marketplaces that will attract a significant
number of users with demographic characteristics valuable to advertisers. Our
inability to deliver business content that attracts a loyal user base with
demographic characteristics attractive to advertisers could impair our business,
financial condition and operating results. We face the challenge of delivering
content that is attractive to users in an environment characterized by rapidly
changing user preferences, as well as the ease with which users can freely
navigate and instantly switch among a large number of Web sites, many of which
offer content that may be more attractive than ours. If we cannot consistently
anticipate or respond quickly to changes in user preferences or distinguish our
content from that offered on other Web sites, we may never attract a significant
number of users with demographic characteristics that advertisers are seeking.

OUR FAILURE TO BUILD AND MAINTAIN RELATIONSHIPS WITH THIRD-PARTY CONTENT
PROVIDERS MAY IMPAIR OUR OPERATING RESULTS.

We have relied on, and expect to rely increasingly on, third parties such
as freelance authors, trade publications and news wires to provide content for
our industry marketplaces. It is critical to our business that we maintain and
build existing and new relationships with content providers. However, we may not
be able to do so, which could result in decreased traffic on our industry
marketplaces and decreased advertising revenues. Many of our agreements with
content providers are for initial terms of one to two years. Content providers
may choose not to renew the agreements or terminate the agreements early if we
do not fulfill our contractual obligations. Moreover, like our existing
agreements with some of our content providers, our new and renewal agreements
for third-party content may be non-exclusive, which means that competitors may
offer the same content we offer or similar content. Additionally, the terms of
any new or renewal agreements we enter into may be less favorable to us than our
existing agreements. In particular, as competition for content increases, the
licensing fees we pay to our content providers may correspondingly increase,
which would negatively impact our operating results.

IF WE DO NOT DEVELOP THE "VERTICALNET" BRAND AND OUR OTHER BRANDS, OUR REVENUES
COULD DECREASE.

To be successful, we must establish and strengthen the awareness of the
"Verticalnet" brand and our other brands. If our brand awareness is weakened, it
could decrease the attractiveness of our products and services to our suppliers,
buyers and users, which could result in decreased revenues. We believe that
brand recognition will become increasingly important in the future with
increasing competition between Internet sites and e-commerce solution providers.
If customers do not begin to associate secondary meaning with our

brands, then our ability to gain market share will be diminished, which could
impair our business, financial condition and operating results.

IF WE ARE UNABLE TO PROVIDE OUR SUPPLIERS, BUYERS AND USERS WITH NEW CUSTOMER
LEADS, OUR INDUSTRY MARKETPLACE STRATEGY WILL NOT SUCCEED.

To enable suppliers, buyers and users to obtain new customer leads through
our industry marketplaces, we currently are responsible for loading suppliers'
product information into our database and categorizing the information for
search purposes. This process entails a number of risks, including dependence on
our suppliers to provide us in a timely manner with accurate, complete and
current information about their products and to update this information promptly
when it changes. The actual loading of this product information in our database
may be delayed, depending upon a number of factors, including the formatting of
the data provided to us and our ability to further automate and expand our
operations to load these data accurately in our product database.

We are generally obligated under our supplier agreements to load and update
product data into our database within a specified period of time following its
delivery. While we intend to further automate the loading and updating of
supplier data on our system, we may not be able to do so in a timely manner, in
part because achieving the highest level of this automation is dependent upon
our suppliers automating their delivery of product data to us. If our suppliers
do not provide us in a timely manner with accurate, complete and current
information about the products we offer, our database may not be useful to our
customers and users as a tool for new customer leads. Although we screen our
suppliers' information before we make it available to our customers and users,
we cannot guarantee that the product information available in our database will
always be accurate, complete and current, or comply with governmental
regulations. Any resulting exposure to liability or decreased adoption and use
of our industry marketplaces could reduce our revenues and therefore have a
negative effect on our business, results of operations and financial condition.

WE MAY HAVE REDUCED STAFFING LEVELS TO LEVELS THAT ARE NOT ADEQUATE TO CONDUCT
OUR BUSINESS.

The number of our employees has declined significantly from December 31,
2000 to October 31, 2001, primarily as a result of reductions in force
instituted to reduce operating expenses and to implement strategic changes in
our business. Current staffing levels may not be sufficient to adequately meet
our business requirements. We may incur additional expenses to hire consultants
or increase staffing levels in the future. Fluctuations in staffing levels and
use of consultants may have a negative effect on our business, results of
operations and financial condition.

RISK OF FAILURE OF OUR COMPUTER AND COMMUNICATIONS HARDWARE SYSTEMS.

The performance of our computer and communications hardware systems is
critical to our business and reputation, as well as our ability to provide high
quality customer service and attract and retain customers, suppliers, users and
strategic partners. Any system interruptions that cause our industry
marketplaces to be unavailable may reduce their attractiveness to users, buyers
and suppliers and could impair our business, financial condition and operating
results.

OUR INTERESTS MAY CONFLICT WITH THOSE OF INTERNET CAPITAL GROUP, OUR LARGEST
SHAREHOLDER, WHICH MAY AFFECT OUR BUSINESS STRATEGY AND OPERATIONS NEGATIVELY.

As a result of its stock ownership and board representation, Internet
Capital Group is in a position to affect our business strategy and operations,
including corporate actions such as mergers or takeover attempts, in a manner
that could conflict with the interests of our public shareholders. At November
1, 2001, Internet Capital Group beneficially owned 25,318,644 shares, or
approximately 25.5%, of our common stock, which includes 250,000 shares of our
common stock underlying $5.0 million of our 5 1/4% convertible subordinated
debt, and 478,624 shares of our common stock underlying warrants issued to
Internet Capital Group prior to our initial public offering. One representative
of Internet Capital Group is a member of our board of directors. We may compete
with Internet Capital Group for Internet-related opportunities as it seeks to
expand its

number of business-to-business assets, in part through acquisitions and
investments. Internet Capital Group, therefore, may seek to acquire or invest in
companies that we would find attractive. While we may partner with Internet
Capital Group on future acquisitions or investments, we have no current
contractual obligations to do so. We do not have any contracts or other
understandings that would govern resolution of this potential conflict. This
competition, and the potential conflict posed by the designated directors, may
deter companies from partnering with us and may limit our business
opportunities.

Additionally, to avoid registration under the Investment Company Act of
1940, Internet Capital Group may need to own more than 25% of our voting
securities and have a representative on our board of directors. If its ownership
interest falls below 25%, Internet Capital Group may need to purchase additional
voting securities to return to an ownership interest of at least 25% in order to
avoid having to register as an investment company. The possible need of Internet
Capital Group to maintain a 25% ownership position could adversely influence its
decisions regarding actions that may otherwise be in the best interests of our
public shareholders.

Additionally, significant changes in Internet Capital Group's ownership of
our common stock could adversely affect our common stock's market price. For
example, rather than purchase additional voting securities as described in the
preceding paragraph, Internet Capital Group may choose to liquidate its position
entirely to avoid having to register as an investment company. If Internet
Capital Group sells all or part of its investment in us, whether to comply with
the Investment Company Act of 1940, to raise additional capital or otherwise,
then the market price of our common stock could fall.

OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL WHOM WE MAY NOT BE ABLE TO RETAIN, AND
WE MAY NOT BE ABLE TO HIRE ENOUGH ADDITIONAL PERSONNEL TO MEET OUR NEEDS.

We believe that our success depends on continued employment of our senior
management team. If one or more members of our senior management team were
unable or unwilling to continue in their present positions, our business,
financial condition and operating results could be materially adversely
affected.

Our success also depends on having a highly trained technical staff, sales
force and customer service organization. We will need to continue to hire
personnel with the skill sets necessary to operate our business as we refine our
business strategies and as our business grows. Competition for personnel,
particularly for employees with technical expertise, is intense. A shortage in
the number of trained technical personnel, salespeople and customer service
professionals could limit our ability to design, develop and implement our
products, increase sales of our existing products and services and make new
sales as we offer new products and services. Ultimately, our business, financial
condition and operating results will be impaired if we cannot hire and retain
suitable personnel.

OUR SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH IS
UNCERTAIN.

Business-to-business e-commerce is a new and emerging business practice
that remains largely untested in the marketplace and depends on the increased
acceptance and use of the Internet as a medium of commerce. If e-commerce does
not grow or grows more slowly than expected, our business will suffer. Our
long-term success depends on widespread market acceptance of e-commerce.

A number of factors could prevent such acceptance, including the following:

- buyers may be unwilling to shift their purchasing to online solutions;

- the necessary network infrastructure for substantial growth in usage of
the Internet may not be adequately developed;

- buyers and suppliers may be unwilling to use online vendors due to
security and confidentiality concerns;

- increased government regulation or taxation may adversely affect the
viability of e-commerce;

- insufficient availability of, or changes in, telecommunication services
could result in slower response times or inconsistent service quality;

- online transactions generally lack the human contact that offline
transactions offer; and

- lack of availability of cost-effective, high-speed Internet service.

SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
E-COMMERCE.

The secure transmission of confidential information over the Internet is
essential to maintaining customer and supplier confidence. Concerns regarding
security of transactions and transmitting confidential information over the
Internet may negatively impact our business. We believe that concerns regarding
the security of confidential information transmitted over the Internet, such as
credit card numbers, prevent many potential customers from engaging in online
transactions. If we do not add sufficient security features to future product
releases, our products may not gain market acceptance or we may incur additional
legal exposure. We have included basic security features in some of our products
to protect the privacy and integrity of customer data, such as password
requirements for access to portions of our industry marketplaces. We currently
use authentication technology, which requires passwords and other information to
prevent unauthorized persons from accessing a supplier's information. We also
use encryption technology, which transforms information into a "code" designed
to be unreadable by third parties, to protect confidential information such as
credit card numbers in commerce transactions.

Despite the measures we have taken, our infrastructure is potentially
vulnerable to physical or electronic break-ins, viruses or similar problems. If
a person circumvents our security measures, he or she could misappropriate
proprietary information or cause interruptions in our operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more prevalent, our suppliers will
become more concerned about security. Our failure to address these concerns
adequately could impair our business, financial condition and operating results.

LIMITED INTERNET INFRASTRUCTURE MAY HARM OUR BUSINESS.

The significant growth of Internet traffic over a relatively short period
of time has caused frequent periods of decreased Internet performance, delays
and, in some cases, system outages. These problems are caused by limitations
inherent in the technology infrastructure supporting the Internet and the
internal networks of Internet users. If our existing or potential suppliers and
users experience frequent outages or delays on the Internet, our business may
grow more slowly than we expect or even decline. Our ability to grow our
business is limited by and depends upon the reliability of both the Internet and
the internal networks of our existing and potential suppliers, buyers and users.
If improvements in the infrastructure supporting both the Internet and the
internal networks of our users, buyers and suppliers are not made timely, we may
have difficulty obtaining new customers or maintaining our existing ones, either
of which could reduce our potential revenues and have a negative impact on our
business, results of operations and financial condition.

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND MAY INFRINGE THE
PROPRIETARY RIGHTS OF OTHERS.

Proprietary rights are important to our success and our competitive
position. We may be unable to register, maintain and protect our proprietary
rights adequately or to prevent others from claiming violations of their
proprietary rights. As of November 1, 2001, we own and use 16 trademarks
registered with the United States Patent and Trademark Office ("PTO").
Additionally, we have 28 applications for registration of various trademarks
pending with the PTO. We have 10 state trademark registrations. Outside of the
United States, as of November 1, 2001, we own and use 6 trademarks registered
with various foreign patent and trademark offices. Likewise, as of November 1,
2001, we have 12 patent applications pending with the PTO and 6 international
applications pending. Additionally, we own 1485 tLD domain names and 124
ccTLD/gTLD domain names. Lastly, as of November 1, 2001, we have 56 copyrights
registered with the Library of Congress ("LOC") and 19 applications for
registration of various copyrights pending with the LOC.

Certain proprietary technology underlying our software is the subject of
pending patent applications. Our ability to fully protect this technology is
contingent upon the ultimate issuance of the corresponding patents. In addition,
effective patent, copyright and trade secret protection of our software may be
unavailable or limited in certain countries.

Generally, our domain names for our industry marketplaces cannot be
protected as trademarks because they are considered "generic" under applicable
law. In addition, effective copyright, trademark, patent and trade secret
protection may be unavailable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of our work. We also license content from third parties, which makes it possible
that we could become subject to infringement actions based upon the content
licensed from those third parties. We generally obtain representations as to the
origin and ownership of such licensed content and indemnification from those
third parties; however, this may not adequately protect us. Any of these claims,
regardless of their merit, could subject us to costly litigation and divert the
attention of our technical and management personnel.

WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER
THE INTERNET.

Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content they offer. We may be subject to
legal claims relating to the content on our industry marketplaces, or the
downloading and distribution of such content. Claims could also involve matters
such as defamation, invasion of privacy and copyright infringement. In addition,
some of the content provided on our industry marketplaces is drawn from data
compiled by other parties, including governmental and commercial sources, and we
re-key the data. This data may have errors. If our content is improperly used or
if we supply incorrect information, it could result in unexpected liability. Our
insurance may not cover claims of this type, or may not provide sufficient
coverage. Our business, financial condition and operating results could suffer
materially if costs resulting from these claims are not covered by our insurance
or exceed our coverage.

SEVERAL LAWSUITS HAVE BEEN BROUGHT AGAINST US AND THE OUTCOME OF THESE LAWSUITS
IS UNCERTAIN.

Several lawsuits have been brought against us and the underwriters of our
initial public offering. These lawsuits allege, among other things, that the
underwriters engaged in sales practices that had the effect of inflating our
stock price, and that our prospectus for this offering was materially misleading
because it did not disclose these sales practices. We intend to vigorously
defend against these lawsuits. No assurance can be given as to the outcome of
these lawsuits.

WE ARE SUBJECT TO GOVERNMENT REGULATION THAT EXPOSES US TO POTENTIAL LIABILITY
AND NEGATIVE PUBLICITY.

It is also possible that a number of laws and regulations may be adopted or
interpreted in the United States and abroad with particular applicability to the
Internet. These laws and regulations may, for example, cover issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights, access charges
and information security. The enactment of such laws could have a negative
effect on our business, financial condition and operating results.

We post our privacy policy and practices concerning the use and disclosure
of user data on our industry marketplaces. Any failure by us to comply with our
posted privacy policy, Federal Trade Commission ("FTC") requirements or other
privacy-related laws and regulations could result in proceedings by the FTC or
others which could potentially have an adverse effect on our business, results
of operations and financial condition.

SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT OR FUTURE SHAREHOLDERS MAY CAUSE
OUR STOCK PRICE TO DECLINE.

If our shareholders or optionholders sell substantial amounts of our common
stock in the public market, including shares issued in connection with completed
or future acquisitions or upon the exercise of outstanding options and warrants,
then the market price of our common stock could fall.

As of November 1, 2001, the holders of up to approximately 27,353,408
shares of common stock, warrants to purchase 2,127,038 shares of common stock
and 107,675 shares of Series A preferred stock, which are convertible into
approximately 1,239,428 shares of common stock, have demand and/or piggyback
registration rights. Under the terms of the Series A preferred stock, we may
elect to pay the dividends payable thereunder by issuing shares of Series A
preferred stock or shares of common stock, rather than paying cash dividends. As
of September 30, 2001, cumulative dividends of $9.3 million had been earned by
the holder of our Series A preferred stock, of which $7.7 million were paid in
the form of additional shares of Series A preferred stock and the remainder of
which are accrued and remain payable. The shares of common stock underlying any
dividended shares of Series A preferred stock and any dividended shares of
common stock are also subject to demand and piggyback registration rights. The
exercise of such rights could adversely affect the market price of our common
stock.

We have filed a shelf registration statement to facilitate our acquisition
strategy, as well as registration statements to register shares of common stock
under our stock option and employee stock purchase plans. Shares issued pursuant
to existing or future shelf registration statements, upon exercise of stock
options and in connection with our employee stock purchase plan will be eligible
for resale in the public market without restriction.

ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT.

Verticalnet is a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a third party to acquire
control of us, even if such change in control would be beneficial to our
shareholders. Our articles of incorporation provide that our board of directors
may issue preferred stock without shareholder approval. In addition, our bylaws
provide for a classified board, with each board member serving a staggered
three-year term. The issuance of preferred stock and the existence of a
classified board could make it more difficult for a third party to acquire us.

OUR COMMON STOCK PRICE IS LIKELY TO REMAIN HIGHLY VOLATILE.

The stock market in general, and the market for stocks of Internet-related
and technology companies in particular, have been highly volatile. The market
price of our common stock and our daily trading volume have been, and will
likely continue to be, similarly volatile. Investors may not be able to resell
their shares of our common stock following periods of volatility because of the
market's adverse reaction to such volatility. The trading prices of many
technology and Internet-related companies' stocks reached historical highs in
early 2000 and reflected relative valuations substantially above historical
levels. Since that time, many of these companies' stocks have also recorded lows
well below their historical highs. Our stock may not trade at the same levels as
other Internet-related or technology stocks.

Factors that could cause such volatility may include, among other things:

- general economic conditions, including suppressed demand for technology
and related services;

- actual or anticipated variations in quarterly operating results;

- announcements of technological innovations;

- new products or services;

- changes in financial estimates by securities analysts;

- conditions or trends in business-to-business usage of the Internet or the
software and related services industry;

- changes in the market valuations of other Internet, software or
technology companies;

- failure to meet analysts' or investors' expectations;

- announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;

- capital commitments;

- additions or departures of key personnel; and

- sales of common stock or instruments convertible into common stock.

Many of these factors are beyond our control. These factors may cause the
market price of our common stock to fall, regardless of our operating
performance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to risks associated with interest rate changes and changes
in the market value of our investments.

Interest Rate Risk. Our exposure to market risk related changes in
interest rates relates primarily to our investment portfolio. We invest in
instruments that meet high quality credit standards, as specified in our
investment policy. The policy also limits the amount of credit exposure we may
have to any one issue, issuer or type of investment. As of September 30, 2001,
our portfolio of investments included $52.6 million in cash and cash
equivalents. Due to the conservative nature of our investment portfolio, we
believe that a sudden change in interest rates would not have a material effect
on the value of the portfolio. We estimate that if the average yield of our
investments had decreased by 100 basis points, our interest income for the nine
months ended September 30, 2001 would have decreased by less than $0.4 million.
This estimate assumes that the decrease occurred on the first day of the year
and reduced the yield of each investment instrument by 100 basis points. The
impact on our future interest income and future changes in investment yields
will depend largely on the gross amount of our investment portfolio.

Investment Risk. We invest in equity instruments of privately-held
companies for business and strategic purposes. These investments are included in
other investments and are accounted for under the cost method when ownership is
less than 20% and we do not have the ability to exercise significant influence
over operations. As of September 30, 2001 we hold cost method investments of
approximately $23.6 million, of which our Converge investment is $19.6 million.
For these investments in privately-held companies, our policy is to regularly
review the assumptions underlying the operating performance and cash flow
forecasts in assessing the recoverability of the carrying values. We identify
and record impairment losses on long-lived assets when events and circumstances
indicate that such assets might be impaired. During the nine months ended
September 30, 2001, we recorded $206.2 million of impairment charges for other
than temporary declines in the fair value of several of our cost method
investments. Approximately $195.4 million of the impairment charge was related
to a third quarter write-down of our Converge investment. Since our initial
investment, certain of these investments in privately-held companies have become
marketable equity securities upon the investees' completion of initial public
offerings or the acquisition of the investee by a public company. Such
investments, most of which are in the Internet industry, are subject to
significant fluctuations in fair market value due to the volatility of the stock
market. As of September 30, 2001, the fair market value of these investments
included in short-term and long-term investments was $1.1 million.

In connection with Ariba's acquisition of Tradex Technologies, Inc., we
received Ariba common stock. In July 2000, we entered into forward sale
contracts relating to our investment in Ariba. Under these contracts, we pledged
our shares of Ariba's common stock to the counterparty for a three-year period
in return for approximately $47.4 million of cash. At the conclusion of the
three-year period, we have the option of delivering either cash or the pledged
Ariba shares to satisfy the forward sale. However, we will not be required to
deliver shares in excess of those we pledged. If we choose to deliver Ariba
shares to satisfy the forward sale, the number of Ariba shares to be delivered
at maturity may vary depending on the then market price of Ariba's common stock.
We have only limited involvement with derivative financial instruments and do
not use them for trading purposes. Our risk of loss in the event of
nonperformance by the counterparty under the forward sales contract is not
considered to be significant. Although the forward sales contract exposes us to
market risk, fluctuations in the fair value of these contracts are mitigated by
expected offsetting fluctuations in the value of the pledged securities.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 13, 2001, a lawsuit was filed against the Company in
Massachusetts Superior Court (Peter L. LeSaffre, Robert R. Benedict and R.W.
Electronics, Inc. v. NECX.com LLC and Verticalnet, Inc., C.A. No.
01-3724-B.L.S.). The suit alleges that, in connection with the Company's
acquisition of R.W. Electronics, Inc. in March 2000, certain Verticalnet and
NECX officials made representations about certain technologies that the
companies would be using to make them even more successful and profitable. As a
result of the alleged failure to use this technology, plaintiffs claim they only
received $43.0 million on the sale of R.W. Electronics, rather than the $78.0
million that they claim they were entitled to.

The Company has retained counsel to defend against the lawsuit and filed a
motion to dismiss the action on October 12, 2001.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

(c) During the quarter ended September 30, 2001, we issued the following
unregistered securities pursuant to the following transaction:

(i) On September 10, 2001 we paid quarterly dividend payments totaling
$1.6 million to the holder of our Series A preferred stock in the form of
1,591 shares of our Series A preferred stock.

This transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The transaction was privately negotiated and
did not include any general solicitation or advertising. The purchaser
represented that it was acquiring the shares without a view to distribution and
was afforded an opportunity to review all publicly filed documents and to ask
questions and receive answers from our officers.

(d) Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

(a) None.

(b) As of September 30, 2001, cumulative dividends of $1.6 million had been
earned by, but not yet paid to, the holder of our Series A preferred stock.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter
ended September 30, 2001.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

None.

(b) Reports on Form 8-K.

None.

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, in Horsham,
Pennsylvania, on November 14, 2001.

VERTICALNET, INC.

By: /s/ MICHAEL J. HAGAN
------------------------------------
Michael J. Hagan
President and Chief Executive
Officer

By: /s/ DAVID KOSTMAN
------------------------------------
David Kostman
Chief Financial Officer and
Chief Operating Officer