Edgar Filing: VERTICALNET INC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

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COMMISSION FILE NUMBER 000-25269

VERTICALNET, INC.

PENNSYLVANIA 23-281834
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(STATE OF INCORPORATION) (I.R.S. ID)

300 CHESTER FIELD PARKWAY
MALVERN, PENNSYLVANIA 19355
(610) 240-0600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK

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

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

The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 2002 was approximately $70,486,742.

The number of shares outstanding of the registrant's common stock as of
March 15, 2002 was 115,224,458.
DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set
forth herein, is incorporated by reference from the registrant's definitive
proxy statement relating to the annual meeting of shareholders to be held in
June 2002, which definitive proxy statement shall be filed with the Securities
and Exchange Commission within 120 days after the end of the fiscal year to
which this report relates.
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VERTICALNET, INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

INDEX

PAGE
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Cautionary Statement Regarding Forward-Looking Statements............. ii
Informational Note Regarding Prior Stock Splits....................... ii
PART I
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 15
ITEM 3. Legal Proceedings........................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
ITEM 6. Selected Financial Data..................................... 18
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Factors Affecting our Business Condition.................... 38
ITEM 7a. Quantitative and Qualitative Disclosure About Market Risk... 46
ITEM 8. Financial Statements and Supplementary Data................. 48
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 91
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 91
ITEM 11. Executive Compensation...................................... 91
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 91
ITEM 13. Certain Relationships and Related Transactions.............. 91
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 92
Signatures............................................................ 95

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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 the design, development and implementation of our products; the
strategies underlying our business objectives; the benefits to our customers and
their trading partners of our products; 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, the availability of and terms of equity and debt
financing to fund our business; our reliance on the development of our
enterprise software business; the timing and terms of any sale of our SMB unit;
competition in our target markets; 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.

INFORMATIONAL NOTE REGARDING PRIOR STOCK SPLITS

Information in this report has been adjusted to reflect two separate
two-for-one splits of our common stock, the first of which was effected on
August 20, 1999 and the second of which was effected on March 31, 2000.

PART I

ITEM 1. BUSINESS

Verticalnet, Inc., which was incorporated on July 28, 1995 under the laws
of Pennsylvania, is referred to throughout this report as "Verticalnet," "the
registrant," "we," "us" or through similar expressions. For financial
information about our reportable business segments, we refer you to our
consolidated financial statements and the related notes thereto found in Item 8
of this report.

We are a leading provider of collaborative supply chain solutions that
enable companies, and their supply and demand chain partners to communicate,
collaborate, and conduct commerce more effectively. With a comprehensive set of
collaborative supply chain software applications including spend management,
strategic sourcing, collaborative planning, and order management, we offer a
broad integrated supply chain solution delivered through a multi-party platform.
With our completion of the acquisition of Atlas Commerce in December 2001 and
the February 2002 announcement of our decision to sell our Small/Medium Business
("SMB") unit that operates and manages the 59 industry-specific on-line
marketplaces, we have completed a business transformation from our origins as an
operator of online public vertical communities to a business solely focused on
delivering supply chain solutions to enterprise customers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Company Overview" for a discussion of the significant changes in our business in
2001.

COMPANY OVERVIEW

Collaborative Supply Chain Solutions

Our collaborative supply chain solutions enable companies and their entire
network of business partners to reap the benefits of working together and
sharing information. Verticalnet(TM) Strategic Sourcing, Collaborative Planning,
and Order Management enable supply- and demand-chain partners to communicate,
collaborate and conduct commerce more effectively and efficiently on a global
scale.

A collaborative supply chain is composed of a company and its customers,
distributors, contract manufacturers and multiple tiers of suppliers, all
securely connected to enable the rapid sharing of important, time-sensitive
information about demand, supply, inventory and orders, and the sharing of
workflow across the entire network of business partners to improve business
performance.

Verticalnet(TM) Strategic Sourcing

Our strategic sourcing solution helps an enterprise analyze all of its
purchasing -- across disparate divisions, locations and information systems. Our
software highlights areas where companies can save money and also helps them
identify and negotiate with suppliers. Additionally, our strategic sourcing
solution enables our customers to measure and report on supplier performance,
savings and other pertinent aspects of the sourcing process. Companies that
implement our strategic sourcing solution can save on direct and indirect
materials purchases.

Verticalnet(TM) Collaborative Planning

Our collaborative planning solution communicates changes in market demand
throughout the supply chain on a real-time basis, increasing information
visibility and velocity across multiple layers of the supply chain. Instead of
waiting weeks for information to flow through multiple planning systems, supply
chain partners receive and can react to changes immediately, revising production
plans and coordinating with their suppliers to optimize production and customer
service. Everyone within an extended supply chain has access to timely,
relevant, critical information. Traditionally, organizations deal with stagnant
information by holding excess inventory. Our collaborative planning solution
gives companies and their suppliers access to accurate and timely information
that they can use to reduce excess inventory levels.

Verticalnet(TM) Order Management

Our order management solution enables companies to ensure that the right
amount of the right products and materials gets to the right place at the right
time by optimizing complex, global supply chain processes such as outsourced
manufacturing, vendor-managed inventory, and multi-currency, multi-company order
management. Our order management software can help companies improve the time it
takes to fill their orders and reduce the cost of their order processing and
materials.

Competitive Advantage

Over the past several years, we have developed a suite of integrated,
multi-enterprise software applications that co-exist with the existing
information technology (IT) infrastructures of our customers. The technology
behind this suite of applications, our eXtended Enterprise Management
Foundation, allows us to offer solutions that we believe are more effective, as
well as faster and easier to implement than those of our competitors. Our entire
suite of collaborative supply chain applications operates in a non-intrusive
layer above a company's IT infrastructures, and takes advantage of that
infrastructure, unlike other solutions that require a company to replace their
existing technology or make extensive system modifications.

We believe our solutions provide the following benefits:

Multi-enterprise:

- Extensive sharing of data and business processes among and across
businesses.

- Inexpensive integration through the Internet -- no software is required
for trading partners. Our system is available throughout the world using
a standard web browser.

Non-intrusive:

- Our software extends the value of a company's existing supply chain and
enterprise resource planning systems to include supply chain trading
partners. Our non-invasive solutions help businesses achieve the full
value they may not have been able to achieve using their existing
systems, without disrupting the current systems.

Secure and Scalable:

- Scalable technology, which a customer has used to connect over 10,000 of
its buyers and suppliers at one time.

- Built-in security rules ensure that information is seen only by the
trading partners who are supposed to have access to it, and in the right
format, language and currency.

Fast:

- Implementation of our software ranges from 3 to 6 months.

- With rapid implementation our solutions can provide a more rapid return
on the investment in our software.

Value Proposition

Our solutions should deliver measurable, sustainable value to our
customers. We believe our applications improve both our customers' financial
performance and the customer satisfaction for our customers and their trading
partners in their business transactions:

Income Statement:

- Revenues can increase because of a better inventory in-stock position and
faster response to demand changes.

- Costs of goods sold can decrease because of more effective purchasing and
reduced inventory obsolescence write-offs due to better supply planning.
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- General and administrative costs can decrease because of increased
automation, reduction in planning and order cycle-times, and a reduction
in planning and order errors.

- Interest and financing costs can decrease because of reductions in
capital needed to finance excess inventory and buffer stocks.

Balance Sheet:

- Inventory can decrease because of better ability to see anticipated
demand, allowing for direct reductions in buffer stocks. Greater
visibility spans the entire supply chain, which can provide better supply
and demand collaboration and reduced supplier lead times.

Customer Satisfaction:

- Customer satisfaction can increase due to higher order-fill rates,
on-time deliveries and a reliable supplier base.

OUR SOLUTIONS

We offer three collaborative supply chain solutions: strategic sourcing,
collaborative planning and order management. We have designed each one to
address a specific set of supply chain challenges. All three applications are
architected on our eXtended Enterprise Management Foundation.

Strategic Sourcing Solution

Overview

Verticalnet(TM) Strategic Sourcing provides an enterprise with the ability
to see where and how spending occurs across its entire enterprise. Our software
extracts this information from a customer's disparate divisions and different
information systems. Our solution provides this visibility to customers on a
real-time basis, without costly modifications to their existing technology
systems and business processes.

Our solution has easy-to-use analytical reports, charts, and graphs to make
it simple for procurement and financial professionals to aggregate spend across
divisions, suppliers, and locations. We also deliver on-line sourcing mechanisms
that help an enterprise complete faster sourcing cycles among broader sets of
suppliers to increase competition for selecting suppliers, to analyze bids and
to negotiate contracts. Finally, our software helps customers manage the
performance of their supplier base and procurement organization so they can
manage the performance of their suppliers and manage contracts to realize their
full value.

We offer a full suite of strategic sourcing capabilities. We believe that
offering a full suite separates us from solutions targeted at a narrow sourcing
problem or a single division. We offer strategic sourcing that serves as a
starting point for enhancing the value of the collaborative supply chain. We
believe there are two differences that set us apart from other competitors
offering strategic sourcing solutions:

- We provide cross-enterprise views of both spending activity and supplier
activity, pulling data from disparate systems and normalizing this data
on an as needed basis. This allows a customer to identify the best
opportunities for sourcing and to monitor its supplier management
processes.

- We enable suppliers to quickly and seamlessly connect to a trading
community for sourcing events. This improves our customer's flexibility
to include different suppliers and decreases difficulties that suppliers
may have in participating. Where other solutions require a predefined
supplier set for each sourced category, our technology allows easy
integration and flexible supplier involvement.

Our applications enable the customer to approach the strategic sourcing
process in three steps, designed to bring them continuous improvement through
better sourcing decisions and more proactive sourcing behavior:

- Identify savings, through our spend management solution

- Realize savings, through our sourcing events solutions

- Maintain savings, through our spend management solution

Identify Savings

Our software enables procurement professionals and executives to see and
analyze spend information across the entire enterprise. Verticalnet(TM) Spend
Management aggregates and normalizes spend information from multiple
systems -- allowing robust spend analysis without disrupting a customer's
existing information technology infrastructure. We believe the benefits of this
application include the following:

- A single view of spend activities across the entire enterprise

- On-demand access to timely spend data -- providing new cost structure
insights, and enabling faster, more efficient sourcing cycles

- Rapid identification of time sensitive cost savings opportunities

- Ability to monitor supplier price/cost performance

- Ability to maintain divisional data integrity (naming conventions, stock
keeping unit numbering) while gaining enterprise visibility

- No changes to existing enterprise resource planning and/or legacy systems

Verticalnet(TM) Spend Management provides the insight and analytics to
measure ongoing purchasing behavior, resulting in optimized sourcing decisions.

We include reporting and analytical capabilities with our spend management
solution. This provides our customers with the ability to see where and how they
are spending throughout the world, identify supply management problems,
highlight opportunities to reduce costs, support supplier negotiations, monitor
savings, and measure supply management effectiveness.

Realize Savings

We developed Verticalnet(TM) Sourcing Events to help customers realize
savings by automating their sourcing business processes and providing most of
their sourcing alternatives, from auctions and catalogs to sophisticated online
negotiations among multiple parties. These include: request for information
(RFI), requests for quotation (RFQ), request for proposal (RFP), auction,
structured negotiations, bid analysis, and contract awarding. We support
sourcing processes for indirect goods, direct materials, and finished goods. Our
customers can create value by effectively communicating requirements to
potential suppliers, then negotiating the best strategic terms to minimize total
costs.

Our software offers the ability for our customer's authorized suppliers to
gain visibility into any request for quotation or sourcing, even for products
that they may not currently be selling to the company. Our technology enables
seamless management of suppliers in a sourcing community, allowing for any
qualified supplier to participate in any sourcing event. We believe this
increases the speed with which sourcing events can be completed, and leads to
participation by a greater number of potential suppliers, which delivers
significant potential cost savings for our customers.

Maintain Savings

After sourcing cycles are complete, Verticalnet(TM) Spend Management helps
a customer's organization monitor and manage the performance of its supplier
base. Spend management features include supplier scorecards and contract
management. Our flexible supplier scorecard solution allows a customer to
collect supplier performance information from disparate enterprise systems and
create scorecards to measure supplier performance. Supplier scorecards include
company-specific performance criteria, such as pricing, service levels, quality,
and on-time shipments. Supplier scorecards also include weightings for each
criterion, resulting in an overall supplier rating. A customer can also track
supplier performance against historical data to examine trends in supplier
performance.

Our collaborative capabilities allow suppliers to log in over the Internet
on a standard web browser and view their own scorecard information as allowed by
their authorized profile. This benefits our customer by facilitating corrective
action planning for under-performing suppliers and improving overall service
levels. Supplier performance ratings become part of the sourcing process, aiding
supplier selection and negotiation for future sourcing cycles. Verticalnet(TM)
Spend Management can help our customers continue to maintain the savings they
generate through the sourcing cycle and foster better relationships with their
supplier community.

Collaborative Planning Solution

Verticalnet(TM) Collaborative Planning enables an enterprise to share
sensitive information on a secure and confidential basis with trading partners
and other strategic partners in its supply chain. The enterprise has the ability
to control which trading partners see what information, down to detailed levels
of data. It also helps an enterprise work more effectively with its trading
partners through the sharing of:

- Real time demand data

- Demand forecasts

- Schedules

- Inventory plans

- Inventory positions

- Production plans

We designed Verticalnet(TM) Collaborative Planning for enterprises that
recognize the need to shift their focus from internal planning and demand
forecasting to collaborative planning and improved response to actual changes in
their customer demand. Our solution enables signals of changes in demand to move
quickly back through the supply chain. An enterprise can use the demand plans
collected from its customers to create supply plans with the enterprise's
vendors and contract manufacturers. This collaborative planning allows the
enterprise to reduce both its raw materials and its finished goods inventories
and eliminate stock-outs that can cause lost sales and costly production delays.

Our collaborative planning solution helps an enterprise reconcile supply
with demand, enabling collaboration with among its customers, distribution
partners, logistics providers, contract manufacturers, suppliers and suppliers'
suppliers to ensure that plans and schedules are aligned across the complex set
of relationships that comprise the supply chain.

Under current supply chain models, there is often a delay of 4-8 weeks, or
more, between the time a retailer can accurately forecast demand for a product,
and the time that suppliers are able to respond to that demand. While the demand
information sits in the retailer's corporate headquarters or in an OEM's
production planning system, raw materials and component suppliers are forced to
hold excess inventory or risk stock-outs. This results in higher demand
volatility for suppliers further up the supply chain. The inability of an
enterprise and its suppliers to see demand signals, understand them, and rapidly
adapt production plans can result in problems including: excess inventory and
product obsolescence, shortages and lost sales, misallocation of production
facilities, inability to plan material costs, sub-scale purchasing of raw
materials, decreased customer satisfaction, and increased delivery costs.

When an enterprise uses our solution to collaborate with its trading
partners, we believe that our customers and their supply chain partners can
realize the following kinds of benefits:

- Our customer's suppliers receive real-time insight into the demand that
our customer's distribution channels are facing, rather than experiencing
a delay of several weeks for data to move through multiple planning
cycles. This allows the suppliers to maximize their production resources.

- Our customer receives supply commitments for changes in demand, and
automatically rebalances its production and customer delivery schedules.
Communication of production and delivery schedule revisions are routed to
all effected parties automatically through the application.

- Retailers increase their ability to rapidly respond to market shifts,
improving sell-through of products and reducing stock-outs, leading to
increased revenue from sales that would have been lost.

- Our customer sells more of its available product, increasing revenue
while improving the satisfaction of its retail customer.

- The retailer gains improved visibility into the availability of the
products it purchases from our customer, and can plan its sales and
promotion strategy accordingly. The retailer also may be more likely to
increase business with our customer because of our customer's ability to
help the retailer meet its demand forecasts.

- Our customer may also increase sales because of a competitor's failure to
meet product demand. Our customer keeps fill rates up, due to its ability
to mitigate capacity constraints.

Order Management Solution

Verticalnet(TM) Order Management enables an enterprise to improve its
ordering process so that the right amount of the right products and materials
gets to the right place at the right time. When our customer receives an order
for its products, our order management software automatically routes the order
to the appropriate members of the extended supply chain. This gives suppliers,
and suppliers' suppliers, advance notice of orders. When parties change orders,
our software lets suppliers approve or reject changes on-line, avoiding standard
change-order process delays. This same process occurs for inventory tracking
notices and invoices. Our solution can reduce or eliminate the reams of paper
documents shuttling back and forth between customers, suppliers, and suppliers'
suppliers.

Our solution gives an enterprise the ability to send documents -- purchase
orders, invoice information, or inventory tracking notices -- to the right
trading partners in real-time, which can cut weeks out of the ordering process.
Our software can automatically segment orders that impact multiple suppliers,
with each supplier only receiving and having visibility to the information
relating to its products or services.

The traditional process of passing order information from customers to
suppliers is slow and manual -- causing long response times and significant
manpower activity, even in an uncomplicated supply chain. For example, when a
customer sends a purchase order, the sales staff likely converts the purchase
order into a sales order. If the order contains items that are provided by a
contract manufacturer or key supplier, the purchasing department will then cut a
purchase order, which is converted to a sales order by the supplier, and so on,
and so on up the supply chain. Often the time lag from customer order to the
second-tier supplier can be as long as 4-8 weeks. Our order management solution
can significantly reduce this time lag because order information is routed
automatically throughout the supply chain.

As supply chains become increasingly complex, businesses must work with
multiple tiers of suppliers, contract manufacturers, and distribution and
logistics partners. Businesses continue to implement more complicated supply
chain strategies to improve their supply chain efficiency, such as multi-channel
selling, outsourced packaging and manufacturing, and vendor-managed inventory.
This leads to increased difficulty and complexity for enterprises in managing
orders, logistics, and financial cash flows. Increasing supply chain complexity
leads to several business challenges including the need to manage inventory at
each tier of the supply chain, the challenge of lost purchasing power due to
outsourcing, and the difficulty of tracking orders and goods as they move across
the supply chain.
6

We believe our order management software is particularly suited for complex
supply chains. Our solution helps our customers obtain the optimum benefit from
their supply chain strategies. Our solution can improve visibility into the
process of moving orders, materials, and financial settlements among the
multiple parties in the extended supply chain. We expect that increased
visibility throughout the supply chain allows all parties to achieve the
following benefits:

- Reduced inventory cycle time -- key suppliers can see and respond to
orders that pertain to them as they are entered, rather than waiting
until the order works its way through the chain

- Reduced inventory levels -- safety stock and buffers can be reduced at
every step in the supply chain due to the velocity and response enabled
by order management

- Reduced costs by leveraging the purchase volumes of key suppliers

- Better visibility and coordination with outsourced production and
logistics providers

- Reduced supply chain complexity -- save time and paperwork from automated
activities

- Increased customer fill rate -- leading to customer satisfaction

The use of offshore and contract manufacturing has strategic and cost
benefits, but has also resulted in a loss of control in managing
cross-enterprise business processes and critical supply and demand information.
Our solution helps our customers give their manufacturers immediate insight into
orders, gain full visibility into outbound logistics, and manage the integrated,
multi-party financial settlement process that has become more and more
complex -- driving up costs and driving down both system flexibility and
customer service. Our order management software turns the fragmented supply
chain into a "virtual enterprise," enabling our customers to manage these
complex relationships through a multi-lingual, multi-currency solution.

Services Solutions

We offer a full complement of consulting, integration, training and
customer support services. Our team is committed to delivering a quick and
efficient implementation with seamless integration and a smooth operation so
that our customers can achieve their targeted return on investment.

Consulting and Integration Services

Consulting and integration services help customers plan, implement and
manage our software so they achieve their business objectives. At the heart of
our consulting services are straightforward processes and tools that make
software implementations smooth and efficient. The methodology approaches
implementation in well-defined, manageable phases -- rolling out categories,
suppliers and customers over discrete intervals and targets the first actual
customer transaction generally in less than 90 days.

Our project teams are experienced at building and implementing private
exchanges for Global 2000 companies. Our teams are focused with clearly defined
goals, roles and responsibilities. Members of our customer team typically
include:

- Account director -- The person ultimately responsible for the success of
the consulting relationship. This person works with customers to define
goals and assemble resources.

- Project manager -- The person responsible for the success of the
implementation project. This person develops the implementation plan,
guides the team through each step of the implementation process and
regularly measures progress against business goals, providing continuous
feedback and communication to the customer throughout the project term.

- Business consultants -- The people responsible for defining functional
requirements and mapping the software to the customer's business
processes.

- Design consultant -- The person responsible for branding the software and
developing custom reports.

- Technical consultants -- The people responsible for mapping the technical
architecture, establishing production, test and development environments,
performing software customization where required, installing the software
and integrating external systems.

Our project teams are flexible. Customers may choose to use our consulting
services exclusively, or use our services with their own internal resources or
in association with our network of systems integration and consulting partners.
Our partners are trained and certified on our products. They provide consulting,
design, and installation services to ensure that all parts of the solution are
seamlessly integrated into a scalable, well-performing system. Our consulting
partners include KPMG Consulting, Inc., Arthur Andersen Business Consulting KB,
Cap Gemini Ernst & Young, Deloitte Consulting, and PWC Consulting.

Training

Our training services help organizations develop the knowledge and skills
required to successfully deploy, maintain and use our products. Participants
engage in discussions, work on projects and gain hands-on experience using our
software. We tailor our training to meet the needs of the customer. We can
deliver training in a variety of formats, including:

- Pre-designed courses - Self-directed training
- On-site instructor-led training - Train-the-trainer instruction
- Computer-based training

Customer Support

Our customer support services provide all the information, tools and
assistance customers need, including support representatives to respond to
service requests ranging from simple technical inquiries to mission critical
problems. We provide customer support 24 hours a day, 7 days a week, 365 days a
year.

OUR TECHNOLOGY

eXtended Enterprise Management Foundation

All our applications are powered by our patent-pending eXtended Enterprise
Management Foundation technology that enables collaboration among companies and
across the supply chain. Our foundation operates in a non-intrusive layer above
a company's existing enterprise resource planning and enterprise systems. We
designed our technology to leverage and drive additional return on a company's
existing information technology investments.

Our technology offers capabilities and functionality not available from
software vendors that focus on the enterprise's own systems and operations.

Companies have made significant investments in enterprise resource planning
(ERP) systems to link demand from sales offices with inventory in distribution
centers and manufacturing orders and purchase orders in the plants, all within
the enterprise. However, as companies have extended their supply chains and
networks of trading partners outside the enterprise, an enterprise-centric
solution alone cannot provide the efficient supply chain integration required.
While ERP systems provide visibility and process automation within the
enterprise, they were not designed to integrate a company's extended enterprise,
which often contains hundreds, if not thousands, of other companies. In
developing our collaborative supply chain solutions, we set the following goals:

- Provide visibility into critical business information for the network of
businesses that make up the extended enterprise

- Enable automated multi-enterprise business processes to reduce the costs
of supply chain functions such as sourcing, planning and order management

To meet those goals, we designed our collaborative supply chain solutions
on a technology foundation that overlays and leverages, our customers' existing
enterprise systems for multi-enterprise business relationships.
8

Our technology is comprised of business and technical components described below
that form the base for our collaborative supply chain solutions.

Security and relationship management form the core of our Extended
Enterprise Management Foundation. Our applications contain robust capabilities
designed so extended enterprises can maintain their private relationships with
their trading partners.

Our foundation also does not discriminate between buyers and sellers but
defines all participants as members, enabling shifts in role definition
depending on the authorized relationship. All businesses are members of our
customers' collaborative supply chain. Companies participating in an extended
supply chain have certain relationships with many others in the chain -- they
buy from some, sell to others, and have no relationship at all with many more.
Traditional enterprise systems create redundancy and limit flexibility by only
registering companies as either a buyer or a seller. Through controlled access,
all trading partners can use the system to source, sell, plan, and analyze.

Our foundation provides security and confidentiality for the external
trading partners that are incorporated into a company's collaborative supply
chain. Traditional enterprise systems provide some security, but cannot handle
the complexity of multi-enterprise access without significant modifications. We
developed our technology to provide the security that confidential business
information is only viewable by those companies that are authorized to do so.

Member Enablement

We designed our patent pending solutions to support multiple ways for a
company and its trading partners to connect their internal systems. In a
multi-enterprise world, the technology challenge is to connect thousands of
companies with different ERP systems, data formats and communication protocols.
Our technology features connectors that handle industry standard data formats
and communication protocols to integrate with back-end applications. Trading
partners can connect through an Internet connection, XML connection, EDI, email,
fax, pager, or custom services. Our foundation also includes a library of
industry standard transaction sets designed to support integration of trading
partners' systems with minimal effort.

Our solution does not force a customer to impose expensive and
time-consuming standardization among trading partners. Business partners need to
maintain their own data on product, price, order, inventory, and planning and
provide restricted access to this data. For typical ERP systems, segregating the
data appropriately involves a manual, redundant and costly effort. With our
technology, trading partners can continue using their own approaches for
categorization, product identification and specification. Our solution utilizes
a patent pending rules-based ontology system to help automate the process of
bringing together disparate, multi-company data on a regular basis. Our solution
results in a normalized, cross-referenced database that allows each organization
to view information in the terms to which they are accustomed. This approach
minimizes the internal changes required for each trading partner and speeds up
the overall adoption process.

Business Process Management

Our software is designed so that trading partners require no software to
connect to our customers through the Internet. By automating business processes,
more trading partners are able to easily participate across the full breath of
the solution. When action is required, such as updating a plan or committing to
a forecast, the trading partner moves directly from their email into the system
to complete the required action.

Our technology allows trading partners to control the level of
communications they receive, how they receive them, and exactly who has access
to them. Some enterprise-centric systems send out email communications to
trading partners to signify events, such as changes in manufacturing plans, but
these communications often do not meet the trading partner's requirements.

Our solution has a powerful patent pending rules-based transaction
processing engine that can dynamically route documents, update documents, create
new documents and process workflow events without human intervention. Many
systems rely on human action to move from step to step, resulting in information
moving slowly through the supply chain. Our technology automatically generates
information among trading partners.
9

This machine-to-machine communication can reduce administrative costs, reduce
inventory cycle times and eliminate human error for processes that follow
standard business rules.

Catalog Management

Using our solutions, companies throughout the supply chain can maintain
catalogs in their own format, with their own hierarchy structure and numbering
system. While some businesses use the standard UNSPSC system to categorize their
products, most companies use some form of their own product hierarchies, product
numbering systems and supplier identification scheme. We offer simple, patent
pending mapping tools that allow a business in the supply chain to maintain its
catalog data in its own format, yet that information can be viewed by other
businesses in the supply chain in their own formats. We believe this permits
greater trading partner participation than enterprise-centric systems. When
connecting to an extended enterprise, or a customer's e-procurement system under
an enterprise-centric system, the trading partner will have to conform to
standards that are not their own. This may require significant time and
investment or force the trading partner not to participate.

Contracts and Pricing Management

Our contracts and pricing management capabilities are flexible. We designed
them for multi-entity use because businesses with multiple divisions, locations
and disparate enterprise systems have difficulty leveraging national or global
contracts with suppliers or customers, because of differences in freight, taxes,
currency, discounts and rebates. For example, if our customer negotiated a
national contract with a supplier, but freight calculations are different for
locations in Alaska and Hawaii, our foundation treats this as a single contact
with exceptions for ship-to locations in Alaska and Hawaii. Most
enterprise-centric systems require a business to set up individual contracts for
these locations, increasing complexity, and diluting some of the benefits of a
national contract.

Analytical Services

We offer patent pending analytical tools and scorecards built on our
extended enterprise management foundation. Our customers' management teams use
analytical tools and reports to measure and control their businesses. In a
multi-enterprise world, there are few tools that allow multiple companies to
work together and set joint targets, measure performance, share reports and
scorecards with trading partners, and develop improvement plans. Our solution
provides tools that can be viewed by multiple enterprises -- with security built
in -- so that each company only sees what it is supposed to see. For example, a
company may create a scorecard to measure the accuracy of its planning
processes. Each of it customers and suppliers would have access to that
scorecard, but only be able to see their own performance.

Application Services

We designed our application services to address the difficulty inherent in
collaborative supply chains where each trading partner needs to access the same
system and the same information in different languages simultaneously. Our
solution allows the co-existence of synchronized, multi-language environments
around the world on a single system. We use individual user profiles to identify
which language each user sees. Most solutions that support multiple languages
can support only one language on the system at a time. Our solution also
supports different date formats and allows trading partners to utilize their own
planning horizons on shared plans.

Converting pounds to kilograms is not an issue for most systems, however,
in a collaborative supply chain, each partner may have different unit of measure
definitions for the same product, depending on how each partner manages their
business. For example, a case of product at a manufacturer may be split into
smaller cases at a distributor, resulting in a very different meaning for the
product. Our solution supports not only standard conversion approaches, but also
company-product specific unit-of-measure conversion calculations, which is
necessary in supporting multi-company sourcing, planning, and ordering
processes.

Platforms

We believe our solutions are highly scalable due to the separation of
various layers. Our solution has supported 1,200 buyers completing more than $1
billion in transactions with over 12,000 suppliers. We designed the architecture
of our solutions to be available to a customer's supply chain trading partners
completely over the Internet. No software is required for trading partners
because they can access the extended enterprise through the Internet. We believe
this can significantly lower the cost of their participation and their
maintenance costs.

The operating system for our software is based upon standard open
technologies, allowing our solution to be deliverable on both Microsoft and Unix
based platforms.

Our product architecture has the following features:

- Web Server: Our software uses standard HTTP(S) communication at the web
server level. The user interface is HTML delivered in a JSP framework.

- Application Server: Our software is developed based upon J2EE
specifications and utilizes industry leading application server
technologies.

- Database Server: Our software leverages standard connectivity methods
for data interaction including database connection pooling and JDBC.

- Middleware: Our software uses standard middleware processes for
high-transaction communication environments. Our software uses the JMS
standard for communicating with middleware solutions.

SALES AND MARKETING

Our sales operation headquarters are in Malvern, PA. Our direct sales
organization focuses on licensing our collaborative supply chain solutions to
large, multi-national enterprises, as well as to mid-sized enterprises with
complex supply chain issues. Account executives have deep experience in
enterprise software sales, including sales experience from SAP, Accenture, SCT,
and Adexa. We also market our solutions in Europe, Australia and Asia. Our
geographically oriented direct sales force is teamed with pre-sales consultants
that work with prospects to select the proper applications to meet customer
requirements and deliver the greatest value.

We also use indirect sales channels, such as third-party alliances, to
market our solutions, and increase the market penetration of our solutions
through joint marketing and sales activities. Our relationships with KPMG
Consulting, Inc., Arthur Andersen Business Consulting KB, Cap Gemini Ernst &
Young, Deloitte Consulting, and PWC Consulting provide us with access to thought
leaders, industry and supply chain experts that have established relationships
with our key prospects. Such relationships allow us to extend the reach of our
sales efforts without increasing headcount.

We support our sales activities by conducting a variety of marketing
programs, and participate in industry conferences. We maintain relationships
with recognized industry analysts including AMR and Forrester. These firms
advise our target client base as well as provide us with critical feedback into
our product management process. We also conduct lead-generation programs
including advertising, direct mail, e-mail marketing, public relations and
ongoing client communication programs.

PROPRIETARY RIGHTS

We regard our software as proprietary and rely on a combination of trade
secret, patent, copyright and trademark laws, license agreements,
confidentiality agreements with our employees and nondisclosure and other
contractual requirements imposed on our clients, consulting partners and others
to help protect proprietary rights in our products. We distribute our
collaborative supply chain applications under software license agreements, which
typically grant clients nonexclusive, nontransferable licenses to our products
and have perpetual terms unless terminated for breach. Under such typical
license agreements, we retain all rights to market our products.

Use of the licensed software is usually restricted to clients' internal
operations and to designated users. Use is subject to terms and conditions that
prohibit unauthorized reproduction or transfer of the software. We also seek to
protect the source code of our software as a trade secret and as an unpublished,
copyrighted work.

RESEARCH AND DEVELOPMENT

We direct our efforts in research and development to new products,
enhancements of the capabilities in existing products, and expansion of our
collaborative supply chain capabilities. Our internal research and development
team, which is a combination of the Verticalnet and Atlas Commerce staffs, has
developed all of our current products, although we obtained some underlying
technology through acquisition. In developing new products or enhancements, we
work closely with current and prospective clients, as well as with industry
experts, to ensure that our products address critical supply chain needs of
today's businesses. We believe that this collaboration is necessary to develop
and improve our software and products. Our product group works closely with our
marketing, sales, and services groups to develop products that meet real
customer needs. As of March 15, 2002, our research and development staff
consisted of 71 employees.

COMPETITION

The markets for our solutions are highly competitive. Our competitors are
diverse and offer a variety of solutions targeting various segments of the
extended supply chain as well as the enterprise as a whole. Some competitors,
such as enterprise resource planning companies and supply chain management
companies, compete with suites of applications designed to offer out-of-the-box
integration, while most of our competitors offer point solutions designed
specifically to target particular functions or industries. We bring together our
applications in an integrated environment to capture the advantages of both
approaches, and to offer our customers a one-stop shop for their collaborative
supply chain needs. More specifically, we compete with:

- Large enterprise resource planning (ERP) software vendors, including
Oracle, Peoplesoft and SAP, who have added or are attempting to add
capabilities for supply chain planning or business-to-business
collaboration to their transaction system products.

- Supply chain management (SCM) companies, including i2, Adexa, and
Manugistics, who compete principally with our supply chain management
applications.

- Point solution providers, such as Ariba and Commerce One and others that
compete principally with our strategic sourcing and order management
applications.

- Other point solution providers, such as Frictionless Commerce, Emptoris
and eBreviate that compete principally with our strategic sourcing
applications.

- Internal development efforts by corporate information technology
departments.

We believe that the principal competitive factors affecting our market
include breadth and depth of solution, product quality and performance, customer
service, core technology, product features, ability to implement solutions,
value of solutions, and a base of reference customers. Although we believe that
our solutions currently compete favorably with respect to these factors, our
market is evolving rapidly, and we may not be able to maintain our competitive
position against current and potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources.

SMB BUSINESS

In February 2002 we announced our intention to sell the SMB business unit,
which we will account for as a discontinued operation beginning in the first
quarter of 2002.

Our SMB division is a leading provider of internet enabled,
industry-specific supplier networks designed to allow small- to medium-sized
companies to conduct business with enterprise buyers over the Web. It is a

leader in connecting suppliers with large pools of buyers through an open market
model. This is accomplished by delivering suppliers' products and services into:

- SMB's 59 industry-specific on-line marketplaces;

- Relevant industry-specific third-party marketplaces through the
Syndicated Buyers Guide program; and

- Large enterprise buyers.

Our SMB unit operates 59 industry-specific on-line marketplaces within the
following industries:

Communications (7)
Energy (4)
Environment/Utilities (4)
Food/Packaging (7)
Healthcare (5)
High Tech (5)
Manufacturing (8)
Metals (4)
Public Sector (2)
Science (3)
Services (8)
Transportation (2)

NOTE: The numbers in parenthesis represent the number of individual communities
within each sector.

SMB generates revenue from multiple sources, including supplier enablement
solutions ("Marketplace Managers" and "Business Card Listings"), company- or
industry-specific purchasing networks ("Private Supplier Networks"), enterprise
software solutions to manage a PSN ("Content Portal"), traditional industry
buyer/supplier communities ("Verticals"), alliances and advertising.

SMB was created through six years of development, which resulted in a
commerce platform, with the following components:

- 59 industry-specific on-line marketplaces;

- Over 27,000 enabled suppliers;

- 2.0 million registered users;

- 600,000 unique visitors monthly;

- Over 6 million page views per month; and

- Over 9 million newsletters sent monthly.

SMB offers products and services to small- and medium-sized businesses that
are designed to generate leads, which ultimately can be turned into sales. SMB's
products and services are described below:

Marketplace Manager is a hosted software supplier enablement solution that
allows clients to create a digital storefront. These storefronts enable clients
to promote their products and services across an array of public and private
marketplaces on the Web. With marketplace manager a supplier with self-help
tools can quickly and easily:

- Create, store and manage structured and unstructured digital content in a
central data repository;

- Customize and publish content from this single repository discretely into
multiple public and private marketplaces;

- Generate qualified leads;

- Manage and respond to leads with online reporting tools;

- Build brand awareness;

- Drive traffic to its Web sites;

- List its company by keyword and product category; and

- Create a customized electronic transactable catalog.

Marketplace Manager is available with a catalog component of $5,500 per
annual subscription, and without a catalog at $3,500 per annual subscription.

Business Card Listings are low-cost ($1,000 annually) hosted Web offerings
for small suppliers. Business card listings display the company's name,
location, product overview and contact information and are offered in two
variants: purchase order management; and electronic data interchange (EDI)
messaging. Business card listings are mapped into one or more of SMB's online
industry-specific marketplaces, enabling users to click-through to the
supplier's Web site.

Advertising -- With over six million page views per month from business
users SMB offers a platform for advertisers to reach targeted prospects through
banner ads, e-mail lists and newsletters. To take advantage of some of this
potential, SMB recently reached an agreement with DoubleClick whereby it will
handle the sales of SMB's ad space inventory, on a non-exclusive basis.

Private Supplier Networks (PSNs) are a recent addition to SMB's supplier
enablement products. PSNs are targeted at discrete and process manufacturing
companies with complex inbound supply chains that do not have deep integration
with their multiple suppliers. PSNs leverage SMB's portal, marketplace and
enablement assets to create dynamic supplier networks that offer benefits to
both enterprises and suppliers.

EMPLOYEES

As of March 15, 2002, we had 164 employees in our enterprise software
business and 67 in our SMB unit. We consider our relationships with our
employees to be good. None of our employees are covered by collective bargaining
agreements.

EXECUTIVE OFFICERS

The following table sets forth the name, age and position of each person
who was serving as an executive officer as of March 15, 2002.

NAME AGE POSITION
---- --- --------

Michael J. Hagan.......................... 39 Chairman of the Board and Director
Kevin S. McKay............................ 48 President, Chief Executive Officer and Director
David Kostman............................. 37 Chief Operating Officer
Christopher Larsen........................ 43 Executive Vice President of Sales and Marketing
James W. McKenzie, Jr..................... 42 Executive Vice President, General Counsel and
Secretary
John A. Milana............................ 46 Chief Financial Officer

Set forth below is biographical information about each of our executive
officers.

MICHAEL J. HAGAN co-founded Verticalnet in 1995 and has served as Chairman
of the Board since February 2002. Prior to that, he served as our President and
Chief Executive Officer since January 2001. Since our founding, Mr. Hagan has
held various executive positions with us, including Executive Vice President and
Chief Operating Officer immediately before becoming President and Chief
Executive Officer. Prior to our founding, Mr. Hagan was Vice President and
Senior Manager at Merrill Lynch Asset Management from 1990 to 1995. He served at
Merrill Lynch in the areas of finance, technology and accounting. Prior to that
time, Mr. Hagan worked for Bristol Myers Squibb from 1988 to 1990. Mr. Hagan
received a B.S. from St. Joseph's University and is a Certified Public
Accountant.

KEVIN S. MCKAY has served as our President and Chief Executive Officer
since February 2002 and as a director since July 2001. Most recently, Mr. McKay
was President and Chief Executive Officer of Capita Technologies, a leading
technology service provider in the Interpublic Group. Mr. McKay previously
served as Chief Executive Officer of SAP America, Inc., where he had
responsibility for the company's North and Latin American operations, including
all sales and marketing efforts, customer implementation and support. Prior to
that, Mr. McKay was the Chief Operating Officer and the Chief Financial Officer
at SAP America, where his primary duties spanned the financial, accounting, and
operational management of SAP subsidiaries in the

United States, Canada and Latin America. He was also a member of the SAP AG
Extended Management board and the SAP America, Inc. board of directors.

DAVID KOSTMAN has served as our Chief Operating Officer since March 2001,
and as our Interim Chief Financial Officer from October 2001 to February 2002.
Mr. Kostman also served as President of Verticalnet International from July 2000
to October 2001. From 1994 to July 2000, Mr. Kostman worked in Lehman Brothers'
Investment Banking Division. At Lehman Brothers, Mr. Kostman was a Managing
Director, head of the Internet B2B Group and responsible for coverage of Israeli
technology companies. From 1992 to 1994, Mr. Kostman was an investment banker at
N M Rothschild & Sons in London, focusing on Latin American mergers and
acquisitions and privatizations. He has a law degree from Tel Aviv University
and an MBA from INSEAD, Fontainebleau.

CHRISTOPHER LARSEN has served as our Executive Vice President of Sales and
Marketing since April 2001. Prior to this, Mr. Larsen was employed by SAP
America, Inc. from January 1993 to February 2001 in various sales management
positions and most recently as President. Preceding his employment at SAP
America, Inc., Mr. Larsen was a southeast area manager at Software 2000, Inc.
from October 1991 to December 1992. Mr. Larsen was also formerly employed from
August 1988 to October 1991 as a senior account executive at Datalogix, Inc. He
received his B.A. from Wake Forest University.

JAMES W. MCKENZIE, JR. has served as an Executive Vice President since
March 2001 and as our General Counsel and Secretary since January 2000. Mr.
McKenzie was Senior Vice President from January 2000 to March 2001. From October
1995 to January 2000, Mr. McKenzie was a partner at Morgan, Lewis & Bockius LLP,
where he worked in their business and finance practice, with a focus on
securities law and mergers and acquisitions. Between October 1987 and September
1995, Mr. McKenzie was an associate at Morgan, Lewis & Bockius LLP. He received
an A.B. from Dartmouth College, an MBA from The Wharton School at the University
of Pennsylvania and a JD from the University of Pennsylvania Law School.

JOHN A. MILANA has served as our Chief Financial Officer since February
2002, and prior to that was the Chief Financial Officer of Atlas Commerce since
January 2000. Mr. Milana most recently served as the Chief Financial Officer of
SAP America, Inc. where he had responsibility for the financial and
administrative support functions, including investor relations, financial
reporting, accounting, taxes, financial systems, treasury, purchasing and
facilities. Prior to joining SAP America, Inc. Mr. Milana was Vice President of
Finance for Sony Electronics, Inc. Prior to that, from 1977 through 1988, he
served as a member of Price Waterhouse (now PricewaterhouseCoopers) in their
Assurance practice. John Milana is a Certified Public Accountant and graduated
summa cum laude with a B.S. in Commerce (Accounting) from Rider University.

ITEM 2. PROPERTIES

Our corporate headquarters is located in Malvern, Pennsylvania, where we
lease approximately 27,300 square feet for a monthly fee of approximately
$43,000 under a lease that expires June 2006. We lease a development facility in
Endicott, New York, consisting of approximately 7,700 square feet for a monthly
fee of approximately $3,500 under a lease that expires November 2002. Our SMB
unit is headquartered in Horsham, Pennsylvania, where it uses approximately
12,000 square feet of a 83,860 square foot facility which we are actively
marketing.

ITEM 3. LEGAL PROCEEDINGS

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 at progressively
higher prices after the IPO. With respect to Verticalnet, 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; Hoang v. Verticalnet, et al., C.A. No. 01-CV-6864; Morris v.
Verticalnet, et al., C.A. No. 01-CV-9459, and Murphy v. Verticalnet, et al.,
C.A. No. 01-CV-8084. None of the complaints state the amount of any damages
being sought, but do ask the court to award "rescissory damages." We have
retained counsel and intend to vigorously defend ourselves in connection with
the allegations raised in the CJA Action and the other complaints. In addition,
we intend to enforce our 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 us 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 our acquisition of R.W. Electronics in March
2000, certain Verticalnet and NECX officials made representations about certain
technologies that the companies would be using to make them 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. We have retained counsel to defend against the lawsuit and filed a motion to
dismiss the action on October 12, 2001. The plaintiffs filed an amended
complaint on October 24, 2001, and we answered the amended complaint on November
13, 2001. We intend to defend ourselves vigorously in the lawsuit and to enforce
our rights pursuant to the acquisition of R.W. Electronics.

On December 4, 2001, a lawsuit was filed against us in the Montgomery
County (Pa.) Court of Common Pleas in an action captioned Belcher-Pregmon
Commercial Real Estate Co. v. Verticalnet, C.A. No. 01-22968. The suit alleges
that the plaintiff is entitled to a broker commission in excess of $0.4 million
in connection with our former lease of a building in Horsham, Pa. We have
retained counsel to defend against the lawsuit and have filed preliminary
objections asking that the suit be dismissed.

Atlas Commerce filed a lawsuit on June 14, 2001 against a former senior
vice president of Atlas Commerce in the Chester County (Pa.) Court of Common
Pleas in an action captioned Atlas Commerce U.S., Inc., C.A. No. 01-05017. The
lawsuit seeks to recover in excess of $0.6 million in principal and interest in
connection with a loan made to the executive. The former executive answered the
suit on July 30, 2001 and filed counterclaims against Atlas Commerce asserting
breach of an oral agreement. Atlas Commerce asked the Court to dismiss the
counterclaims on August 17, 2001. In a related action, the same executive filed
a lawsuit on December 7, 2001, against Atlas Commerce in federal district court
for the Eastern District of Pennsylvania in an action captioned Barr v. Atlas
Commerce U.S., Inc., C.A. No. 01-CV-6129. The suit alleges violation of the
federal Age Discrimination and Employment Act, and seeks damages in an
unspecified amount. We have retained counsel and answered the complaint on
February 11, 2002.

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 material adverse
effect on our financial position or results of operations.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the Nasdaq National Market under the symbol
"VERT." The following table sets forth, for the periods indicated, the range of
the high and low closing sales prices of our common stock as reported on the
Nasdaq National Market.

HIGH LOW
------- ------

FISCAL YEAR 2001
First Quarter............................................. $ 6.25 $ 1.62
Second Quarter............................................ 3.29 1.34
Third Quarter............................................. 2.16 0.36
Fourth Quarter............................................ 2.09 0.34
FISCAL YEAR 2000
First Quarter............................................. $138.88 $67.50
Second Quarter............................................ 59.75 28.00
Third Quarter............................................. 62.05 30.25
Fourth Quarter............................................ 32.63 4.53

The share price data set forth above reflects a two-for-one stock split
effected in the form of a stock dividend. The record date for the stock split
was March 17, 2000.

At March 15, 2002, we had 787 shareholders of record.

We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance our operations
and expand our business. Any future determination to pay cash dividends will be
at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant. Additionally, under the terms of our
Series A preferred stock, we may not declare or pay, or set aside funds to pay,
any dividend or other distribution to the holders of our common stock or any
other security ranking junior to our Series A preferred stock unless we have
previously declared or paid, or set aside funds to pay, all dividends for
preceding dividend periods to which the holders of our Series A preferred stock
are entitled.

During the quarter ended December 31, 2001, we issued the following
unregistered securities pursuant to the following transactions:

(i) On October 11, 2001 we paid quarterly dividend payments totaling $1.6
million to the holder of our Series A preferred stock in the form of 1,615
shares of our Series A preferred stock.

(ii) On December 28, 2001, we issued 14,157,630 shares of our common stock
valued at approximately $19.3 million in exchange for the outstanding capital
stock of Atlas Commerce, Inc.

These transactions were exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The transactions were privately negotiated
and did not include any general solicitation or advertising. Each purchaser
represented that he, she or 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.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
thereto (see Item 8), as well as Management's Discussion and Analysis of
Financial Condition and Results of Operations (see Item 7).

YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Statement of Operations Data:
Revenues......................... $ 125,570 $ 112,454 $ 18,428 $ 3,135 $ 792
Net loss from continuing
operations.................... (756,949) (202,330) (52,589) (13,594) (4,779)
Basic and diluted net loss per
common share from continuing
operations.................... $ (7.89) $ (2.50) $ (0.84) $ (1.32) $ (0.47)

AS OF DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- -------- -------
(IN THOUSANDS)

Balance Sheet Data:
Total assets..................... $ 125,631 $ 923,284 $318,981 $ 12,343 $ 2,104
Long-term debt................... 24,854 45,287 116,750 5,352 400
Redeemable preferred stock....... 102,180 94,760 -- -- --

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read together with the consolidated financial
statements and the related notes thereto appearing in Item 8 of this report.

COMPANY OVERVIEW

Verticalnet, through its subsidiaries, is a leading provider of
collaborative supply chain solutions that enable companies, and their supply and
demand chain partners to communicate, collaborate, and conduct commerce more
effectively. With a comprehensive set of collaborative supply chain software
applications including spend management, strategic sourcing, collaborative
planning, and order management, we offer a broad integrated supply chain
solution delivered through a multi-party platform. With our completion of the
acquisition of Atlas Commerce in December 2001 and the February 2002
announcement of our decision to sell our Small/Medium Business ("SMB") unit that
operates and manages 59 industry-specific on-line marketplaces, we have
completed a business transformation from our origins as an operator of online
public vertical communities to a business solely focused on delivering supply
chain solutions to enterprise customers.

The SMB business is a leading provider of internet enabled
industry-specific supplier networks designed to allow small- to medium-sized
companies to conduct business with enterprise buyers over the Web.

Verticalnet was founded in 1995 as a provider of industry-specific on-line
marketplaces, starting with WaterOnline.com. We completed our initial public
offering in February 1999. During 1999 and 2000, we acquired companies of three
types to enhance the development of our industry marketplace business:
additional on-line marketplaces to complement our portfolio; transactional and
services businesses and exchanges that we could offer across multiple on-line
marketplaces; and two software companies, Isadra in 1999 to accelerate our
research and development efforts and Tradeum in 2000 to launch a stand-alone
software unit targeting exchanges and on-line market places. In September 2000,
we established three divisions: Verticalnet Markets, our portfolio of on-line
industry marketplaces; Verticalnet Solutions, our software unit built on the
combination of Isadra and Tradeum technology; and Verticalnet Exchanges, an
exchange for trading electronic components and hardware, also known as NECX.

On January 7, 2001, we appointed Michael J. Hagan, our co-founder and chief
operating officer at the time, to become our president and chief executive
officer upon the departure of president and chief executive officer Joseph
Galli, Jr. With an effort to focus the business on its software offerings
already underway through our December 2000 license and services agreements with
Converge, Mr. Hagan led a thorough re-evaluation of the Verticalnet Markets and
Verticalnet Solutions businesses in the first quarter of 2001, with a focus on
core elements needed to develop a profitable software business in a difficult
economic environment. As a result of this scrutiny, we began implementing
significant changes in our business. The steps that we took in each quarter
during 2001 resulted in significantly reduced staffing requirements in stages.
We, therefore, completed four major restructuring efforts to reduce costs and
streamline operations.

During fiscal year 2001 we modified the business significantly in a series
of steps to transform it into an enterprise software business. The following
events occurred:

- on January 31, 2001, we completed the sale of Verticalnet Exchanges to
Converge, allowing management to focus solely on the two remaining
business units, SMB and Enterprise (formerly referred to as Verticalnet
Markets and Verticalnet Solutions) and eliminate redundancies between
them;

- on April 26, 2001, we restructured the Microsoft agreement to focus on
supplier enablement solutions;

- on July 26, 2001, we announced changes in the SMB business;

- on October 9, 2001, we restructured the Converge license and services
agreements as Converge restructured its strategic direction; and

- on December 28, 2001, we acquired Atlas Commerce in an effort to expand
our product and customer base in the software business.

Subsequently, we announced the following recent events in 2002 that further
position us to transform the company into an enterprise software business:

- on February 13, 2002, we announced our intention to sell the SMB unit.
Our board of directors authorized this action to complete our strategic
realignment to an enterprise software business. Beginning in the first
quarter of 2002, we will report the SMB unit as a discontinued operation;
and

- the addition of experienced software executives to our management team:
On February 19, 2002, Kevin S. McKay, a member of our board of directors,
was appointed president and chief executive officer of Verticalnet. Mr.
McKay, a former chief executive officer of SAP America, succeeded Michael
Hagan, who was appointed chairman of Verticalnet. On February 13, 2002,
John Milana, former chief financial officer of Atlas Commerce, and a
former chief financial officer of SAP America, was appointed as
Verticalnet's chief financial officer replacing interim chief financial
officer, David Kostman.

RESTRUCTURING AND ASSET IMPAIRMENTS

During the year ended December 31, 2001, we announced and executed four
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, to improve our operating
efficiency and margins, and to redefine the business as a software company.

Our aggregate restructuring and asset impairment charge for the year ended
December 31, 2001 was approximately $345.5 million, including non-cash related
charges of approximately $321.3 million (see Note 6 to our consolidated
financial statements). Our cost cutting measures during the year ended December
31, 2001 included an aggregate work force reduction of approximately 1,090
employees throughout the organization and various office facility closures. A
significant portion of our headcount reduction was in conjunction with the
restructuring of the Microsoft agreement, the change in focus of the SMB
business and the restructuring of the Converge agreements. As part of our
restructuring efforts we also impaired assets, such as leasehold improvements
for abandoned facilities; excess furniture, office and computer equipment;
purchased and internally developed software; and prepaid assets, which have no
future use in the ongoing operations of the business. As of December 31, 2001 we
have approximately $7.1 million in accrued restructuring expenses primarily
related to employee severance and lease termination costs. This amount is
expected to adequately 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.

We intend to continue focusing on revenue growth, achieving profitability
and reviewing 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.

We operate in an industry that is rapidly evolving and extremely
competitive. Recently, many software businesses have experienced difficulty in
raising capital necessary to fund operating losses and ongoing investments in
strategic relationships. Valuations of public companies in the software 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. We regularly perform reviews to determine whether
events or changes in circumstances indicate that the carrying value of the
goodwill and other intangible assets may not be recoverable. As a result of
these reviews during the year ended December 31, 2001, we recorded impairment
charges of approximately $284.4 million for identifiable intangible assets and
goodwill in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. Aggregate impairment charges of approximately $231.1
million were related to the write-off of goodwill and other identified
intangible assets associated with our Tradeum acquisition. Tradeum was a
development stage software company purchased in March 2000. The acquisition was
financed
20

principally with shares of our common stock. We initially recorded an impairment
in the second quarter of 2001 to reduce identifiable intangible assets and
goodwill to their estimated fair value, which was based upon the valuation of
comparable publicly held businesses. Subsequently in the fourth quarter of 2001,
we recorded an additional impairment to write-off the remaining goodwill and
identified intangibles. The decision to impair the remaining Tradeum goodwill
was primarily based on our acquisition of Atlas Commerce in December 2001 and
our decision to migrate to the Atlas Commerce platform which will replace the
various Tradeum based components of our Enterprise products.

The remaining aggregate impairment charge of approximately $53.3 million
recorded during the year ended December 31, 2001 related to the write off of
goodwill and other intangible assets associated with various acquisitions that
are part of the SMB business, including approximately $20.6 million related to
our acquisition of Verticalnet Europe B.V. ("Verticalnet Europe"). We estimated
the fair value of the continuing SMB business based upon the amounts we could
reasonably expect to realize upon the sale of those assets.

We also recorded an aggregate charge of approximately $231.3 million,
included in other income (expense), net on the consolidated statement of
operations, for impairments to our cost method, equity method and
available-for-sale investments during the year ended December 31, 2001. These
charges for other than temporary declines in the fair value of our investments
are based on reviews of the market conditions and the assumptions underlying the
operating performance and cash flow forecasts. Information obtained is used in
assessing the recoverability of our carrying values for the individual
investments. Approximately $207.2 million of this amount is a write down of our
Converge investment which was previously valued at $215.0 million (see Notes 5
and 9 to our consolidated financial statements). The impairment charge was based
on independent valuations of our Converge investment which we obtained
subsequent to Converge's announcement that it would restructure its business.

At December 31, 2001 as a result of significant losses incurred in 2001,
primarily related to restructuring, goodwill impairment and investment
impairment charges, we had an accumulated deficit in excess of $1.1 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
PERIOD COMMON SHAREHOLDERS COMMON SHAREHOLDERS
------ -------------------------- --------------------
(IN MILLIONS)

Year ended December 31, 2001................. $764.4 $768.3
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

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. 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.

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 5 and 9 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
21

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.

MICROSOFT

On March 29, 2000, we entered into a definitive agreement with Microsoft
(the "Original Microsoft Agreement") with respect to a commercial relationship.
Our commercial relationship with Microsoft had a three-year term during which
Microsoft would purchase storefronts and e-commerce centers from us, and then
either distribute them directly or have us distribute them to third party
businesses. Our intent was that customers would purchase renewals of the
storefront or e-commerce center and additional storefronts or e-commerce centers
on our other e-marketplaces. The Original Microsoft Agreement also included
joint advertising, our use of Microsoft products and services, and funding of
joint development projects.

On April 26, 2001, we entered into a new agreement with Microsoft (the "New
Microsoft Agreement"), which terminated and replaced the Original Microsoft
Agreement. Under the New Microsoft Agreement, Microsoft prepaid to us $40.0
million for the upsell or deployment of enablement products (storefronts,
e-commerce centers and marketplace managers) on their behalf through April 2002.

We received approximately $40.0 million and $67.6 million during the years
ended December 31, 2001 and 2000, respectively, from Microsoft under these
agreements. Under the terms of the Original Microsoft Agreement we paid
approximately $0.5 million and $29.4 million to Microsoft during the years ended
December 31, 2001 and 2000, respectively. Under the Original Microsoft Agreement
we also made royalty payments to Microsoft of approximately $0.2 million and
$0.5 million for the years ended December 31, 2001 and 2000, respectively,
related to additional storefronts and e-commerce centers sold by us.

Collectively, under the Original and New Microsoft Agreements, during the
years ended December 31, 2001 and 2000, we recognized approximately $60.0
million and $30.5 million, respectively, in e-enablement and advertising
revenue. As of December 31, 2001, we have approximately $17.1 million of
deferred revenue related to our Microsoft Agreements. We also had expenses of
approximately $17.9 million and $12.0 million during the years ended December
31, 2001 and 2000, respectively, for advertising, software licensing and support
under the Original Microsoft Agreement.

SMB BUSINESS

In July 2001 we refocused our SMB business on lead generation to its
suppliers rather than e-commerce transactions. We began outsourcing various
functions of the portal business including, content management, advertising
sales and online book sales. By March 15, 2002 we had restructured the SMB
business to 67 employees, which we anticipate will reduce operating costs.

CONVERGE

Below are the contractual payments, including revisions, either made or
still expected from Converge under the revised terms of the agreements:

CONTRACTUAL
PAYMENTS UNDER ADJUSTMENTS DUE TO CASH RECEIVED REMAINING
ORIGINAL OCTOBER 2001 DURING THE YEAR ENDED CONTRACTUAL PAYMENTS
AGREEMENTS CONTRACTUAL CHANGES DECEMBER 31, 2001 AS OF DECEMBER 31, 2001
-------------- ------------------- --------------------- -----------------------
(IN THOUSANDS)

Subscription license.... $ 73,000 $(23,000) $(41,000) $ 9,000
Professional services... 35,000 (23,750) (11,250) --
Maintenance and
support............... -- 4,500 (750) 3,750
-------- -------- -------- -------
$108,000 $(42,250) $(53,000) $12,750
======== ======== ======== =======

During the year ended December 31, 2001, we recognized revenues of
approximately $30.9 million under the Converge agreements. Deferred revenue
related to the Converge agreements is approximately $23.2 million at December
31, 2001.

Verticalnet and Converge entered into a first amendment to the amended and
restated subscription license agreement and a first amendment to the maintenance
and support agreement, both as of February 1, 2002. As a result of these
amendments, the term of each agreement was extended to December 31, 2003. The
amendment to the maintenance agreement reduced our required level of service,
accelerated the payment terms and reduced their aggregate obligation by $0.5
million. From January 1, 2002 through March 15, 2002, we have received
approximately $6.1 million from Converge, with the remaining aggregate payments
of approximately $6.2 million expected over the balance of fiscal year 2002 per
the terms of the amended agreements. The expected contractual payments under the
new agreements plus the remaining deferred revenue under the original agreements
will be recognized on a straight-line basis through December 2003.

On February 15, 2002, we invested $3.5 million in Converge LLC, an indirect
subsidiary of Converge, and received a subordinated promissory note with a face
value of $8.75 million. The note is payable in four equal installments on
February 15th of 2006 through 2009. Repayment of the note is accelerated upon
certain triggering events, including a change of control. In connection with the
investment, we also received a warrant to purchase 3,500,000 shares of preferred
stock in Converge Financial Corporation, a wholly owned subsidiary of Converge
and an indirect parent of Converge LLC, at an initial exercise price of $.01 per
share.

ACQUISITION OF ATLAS COMMERCE

On December 28, 2001, we acquired all of the outstanding capital stock of
Atlas Commerce, a privately held software company that provides private exchange
software and strategic sourcing applications. As a result of the acquisition, we
expect to significantly accelerate our enterprise software business by offering
an integrated collaborative sourcing solution that represents a combination of
both companies' technologies. Atlas Commerce's results of operations will be
consolidated starting January 1, 2002. The aggregate purchase price was
approximately $26.8 million, including transaction costs. The consideration
included $3.5 million in cash, 14,305,708 shares of our common stock valued at
approximately $19.5 million and issuance of employee options to purchase
1,630,075 of our common stock valued as of the date of acquisition at $1.4
million based on an independent valuation. Included in the stock consideration
are 148,078 shares of our common stock to be issued to a former Atlas Commerce
executive in January 2003. A portion of the value of the common stock given as
consideration was reduced by an illiquidity discount ranging from 5% to 10%
based on restrictions detailed in a registration and lock up agreement executed
in connection with the transaction.

The Merger Agreement for the Atlas Commerce acquisition provides a put
option to Atlas Commerce's former common shareholders. These shareholders have
the ability to put a maximum of approximately $1.1 million worth of our common
shares back to us for cash. At the acquisition date the put liability covered
728,883 shares of our common stock. The put is recorded in temporary equity
pursuant to the guidance in EITF Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company's Own
Stock.

Of the $3.2 million of acquired intangible assets, $0.4 million was
assigned to in-process research and development and charged to expense as a
non-recurring charge upon consummation of the acquisition since the in-process
research and development has not yet reached technological feasibility and has
no alternative future use (see Note 4 to our consolidated financial statements).
The remaining $2.8 million of acquired intangible assets have a weighted-average
useful life of 35 months. These intangibles include developed technology of
approximately $1.9 million with a useful life of 36 months and customer
contracts of approximately $0.9 million with a weighted average useful life of
32 months. The $21.6 million of goodwill was assigned to the enterprise software
segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Accounting policies, methods and estimates are an integral part of the
consolidated financial statements prepared by management and are based upon
management's current judgments. Those judgments are normally based on knowledge
and experience with regard to past and current events and assumptions about
future events. Certain accounting policies, methods and estimates are
particularly sensitive because of their significance to the financial statements
and because of the possibility that future events affecting them may differ from
management's current judgments. While there are a number of accounting policies,
methods and estimates affecting our financial statements as described in Note 1
to our consolidated financial statements, areas that are particularly
significant include revenue recognition policies, the assessment of
recoverability of long-lived assets, specifically goodwill and other intangible
assets, the valuation of non-publicly traded investments and estimates made in
calculating restructuring reserves for operating leases related to abandoned
facilities.

Revenue Recognition

Through December 31, 2001, a significant portion of our revenues were
derived from e-enablement, e-commerce, advertising and other services which are
all sources of revenue from the SMB group. Our revenue from software licensing
and related services increased during the year ended 2001 as we began to grow
our Enterprise software business, however the majority of the revenue resulted
from one customer, Converge.

Enterprise

Through December 31, 2001, our software licensing and related services
revenues have been principally derived from one customer, Converge. The original
arrangement with Converge entailed a right to use our existing software as well
as any future software that we developed, the provision of professional
services, and maintenance and support services over the life of the agreements.
Due to the type of professional services that we were providing to Converge, as
well as the fact that Converge is entitled to use free of charge any of our
future software products, revenue related to Converge is being recognized on a
straight-line basis over the term of the arrangements.

Software licensing and related services revenues other than from Converge
have been principally derived from the licensing of our products, from
maintenance and support contracts and from the delivery of professional
services. Customers who license our products also generally purchase maintenance
contracts which provide software updates and technical support over a stated
term, which is usually a twelve-month period. Customers may also purchase
implementation services from us.

We license our products through our direct sales force. The license
agreements for our products do not provide for a right of return other than
during the warranty period, and historically product returns have not been
significant. We do not recognize revenue for refundable fees or agreements with
cancellation rights until such rights to refund or cancellation have expired.
Our products are either purchased under a perpetual license model or under a
time-based license model.

We recognize revenue in accordance with Statement of Position ("SOP") 97-2,
Software Revenue Recognition, as amended by SOP 98-9. We recognize revenue when
all of the following criteria are met: persuasive evidence of an arrangement
exists; delivery of the product has occurred; the fee is fixed and determinable;
and collectibility is probable. We consider all arrangements with payment terms
extending
24

beyond one year to not be fixed and determinable, and revenue under these
agreements is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected.

SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Revenue recognized from
multiple-element arrangements is allocated to undelivered elements of the
arrangement, such as maintenance and support services and professional services,
based on the relative fair values of the elements specific to us. Our
determination of fair value of each element in multi-element arrangements is
based on vendor-specific objective evidence ("VSOE"). We limit our assessment of
VSOE for each element to either the price charged when the same element is sold
separately or the price established by management, having the relevant authority
to do so, for an element not yet sold separately.

If evidence of fair value of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. Revenue allocated to maintenance and support is
recognized ratably over the maintenance term and revenue allocated to training
and other service elements is recognized as the services are performed. The
proportion of revenue recognized upon delivery may vary from quarter to quarter
depending upon the relative mix of licensing arrangements and the availability
of VSOE of fair value for undelivered elements.

Arrangements that include professional services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are not considered essential, the revenue
allocable to the professional services is recognized as the services are
performed. If we provide professional services that are considered essential to
the functionality of the software products, both the software product revenue
and professional service revenue are recognized in accordance with the
provisions of SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. To date most of our professional services
have been considered essential to the functionality and therefore, the majority
of our contracts that involved licenses and professional services were
recognized on a percentage of completion basis.

Deferred revenue includes amounts received from customers for which revenue
has not been recognized, which in most cases relates to maintenance or license
fees that are deferred until they can be recognized. The majority of our
deferred revenue at December 31, 2001 is related to payments received from
Converge. Such amounts will be recognized as revenue on a straight-line basis
over the contract term.

SMB

E-enablement revenue includes storefront, e-commerce center and marketplace
manager fees which are recognized ratably over the period of the contract.
Contracts for storefronts, e-commerce centers and marketplace managers are
normally for a one-year term.

E-commerce fees in the form of transaction fees or percentage of sale fees
are recognized upon receipt of payment. These types of fees, which have been
insignificant to date, included auction, training classes and e-commerce center
transaction related revenues where we received a percentage of the sales price.
E-commerce fees also relate to product sales specifically in our asset
remarketing business, where we take title to the product and recognize the gross
sales amount and cost of product in the period the products are shipped. Each
e-commerce fee revenue stream was analyzed under the gross versus net guidance
provided by Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, and EITF Issue No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent. The factors we prioritized for gross revenue recognition
were inventory risk, credit risk and ability to negotiate sale price.

Advertising revenue includes buttons and banners on the industry
marketplaces as well as ads in electronic newsletters delivered to our
registered users. If the advertising is sold as a time-based service button and
banner revenue is recognized ratably over the service period, whereas, if the
advertising is sold as an

impression based service, then revenue is recognized as impressions are
delivered. Newsletter revenue is recognized when the newsletters are e-mailed.

Other types of revenue historically related to the SMB business included
web development, hosting and maintenance services, normally included in
strategic co-marketing agreements. Web development revenue is recognized on a
percentage of completion basis while hosting and maintenance services are
recognized ratably.

It is common for customers to buy services as a package deal. For example,
we may market to our customers a marketplace manager with a banner advertisement
and two newsletter distributions. For these "multiple-element" arrangements, we
allocate revenue to each element based on its' fair value to the extent
objectively determinable, and recognize revenue for each element as the earnings
process is complete for each element.

Barter contracts, which normally consist of advertising and e-enablement
type services, are evaluated under the guidance of Emerging Issues Task Force
("EITF") Issue No. 99-17, Accounting for Advertising Barter Transactions, which
requires that barter transactions be recorded at the estimated fair value of the
advertisements or other services given, based on recent historical cash
transactions. Barter revenue is recognized based on the service provided as
described above and barter expense is recognized as the services are received. A
prepaid barter asset or liability is recorded if there are timing difference
between our delivery of service and our counterpart's delivery of services to
us. Our barter revenue is declining and, due to our intention to sell the SMB
business, we do not expect to enter into new barter contracts.

Deferred revenue for the SMB business is primarily related to e-enablements
products such as storefronts and marketplace managers which were distributed
under our Microsoft agreement.

Recoverability of Goodwill, Other Intangible Assets and Investments

As discussed in Note 1 to our consolidated financial statements, we
regularly perform reviews to determine whether events or circumstances indicate
that the carrying value of long-lived assets, including goodwill and other
intangible assets, may not be recoverable. Factors we consider important which
could trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of use of the acquired assets or the strategy
for our overall business, significant negative industry or economic trends, a
significant decline in our stock price for a sustained period, and our market
capitalization relative to net book value. When we determine that an impairment
review is necessary based upon the existence of one or more of the above
indicators of impairment, we perform an undiscounted cash flow analysis to
evaluate whether future cash flows from the long-lived asset is below its
current carrying value. If the result from this analysis yields that an
impairment charge is required, we measure the impairment based on a projected
discounted cash flow method using a discount rate commensurate with the risk
inherent in our current business model. Significant judgment is required in the
development of projected cash flows for these purposes, including assumptions
regarding the appropriate level of aggregation of cash flows, their term and
discount rate as well as the underlying forecasts of expected future revenue and
expense. We have recorded significant impairment charges for goodwill and
intangible assets in the past and to the extent that events or circumstances
cause our assumptions to change, additional charges may be required in future
periods and such charges could be material.

We have also recorded significant impairment charges for non-publicly
traded investments which we review quarterly for potential impairment. In
addition to the procedures described above, for one significant privately held
cost method investment, we have obtained independent valuations to assist in
determining the estimated fair value of the investment.

Restructuring Reserves for Abandoned Operating Leases

As discussed in Note 6 to our consolidated financial statements, we have
recorded restructuring charges in connection with our abandonment of certain
facilities which are leased under long-term operating leases. These charges
relate to facilities and portions of facilities we no longer utilize and either
seek to terminate early or sublease. Lease termination costs for the abandoned
facilities were estimated for the remaining lease

obligations based on current negotiations with each respective landlord and
brokerage fees offset by estimated sublease income. Estimates related to
sublease costs and income are based on assumptions regarding the period required
to locate and contract with suitable sub-lessees and sublease rates which can be
achieved using market trend information analyses provided by a commercial real
estate brokerage retained by us. Each reporting period we review these estimates
and to the extent that these assumptions change due to continued negotiations
with landlords or changes in the market, the ultimate restructuring expenses for
these abandoned facilities could vary by material amounts.

RESULTS OF CONTINUING OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND
DECEMBER 31, 2000

The following discussion and comparison regarding results of continuing
operations do not reflect the results of NECX.

Revenues. Revenues were $125.6 million for the year ended December 31,
2001 and $112.5 million for the year ended December 31, 2000.

Revenues from the SMB group, which include e-enablement, e-commerce,
advertising and other services, were $90.0 million for the year ended December
31, 2001 and $104.6 million for the year ended December 31, 2000. A substantial
portion of our SMB revenues for the years ended December 31, 2001 and 2000
(approximately $60.0 million, or 67%, and $30.5 million, or 29%, respectively)
were from our Original and New Microsoft Agreements (see Note 10 to our
consolidated financial statements). Although there was a significant increase in
e-enablement revenues (storefronts, e-commerce centers and marketplace managers)
from our Original and New Microsoft Agreements during the year ended 2001, we
have 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. Our deferred revenue balance at December 31,
2001 is composed of approximately $20.1 million from the SMB group, of which
approximately $17.1 million relates to our Original and New Microsoft
Agreements.

Revenues from the Enterprise group, which include software licensing and
related services, were $35.6 million for the year ended December 31, 2001 and
$7.9 million for the year ended December 31, 2000. Approximately $30.9 million,
or 87%, of our Enterprise group revenues for the year ended December 31, 2001
were from our software licensing and services contracts with Converge. Our
deferred revenue balance at December 31, 2001 is composed of approximately $24.4
million from the Enterprise group, of which approximately $23.2 million relates
to our Converge contracts.

Cost of E-enablement, E-commerce, Advertising and Other Services
Revenues. Cost of e-enablement, e-commerce, advertising and other services
revenues consist primarily of salaries and benefits of editorial and operational
personnel, product costs, depreciation, amortization of internally developed
software and other related operating costs. Cost of e-enablement, e-commerce,
advertising and other services revenues was $21.2 million for the year ended
December 31, 2001 and $39.3 million for the year ended December 31, 2000.
Expenses decreased by:

- $10.8 million for salaries and benefits;

- $3.0 million for direct product costs, including inventory write-down;
and

- $4.3 million for other related operating costs.

The decrease was primarily related to staffing reductions, a decrease in
sales from our asset remarketing business and overall cost cutting efforts
during 2001.

Cost of Software Licensing and Related Services. Cost of software
licensing and related services consist primarily of salaries and benefits of
personnel, third party contractor costs, amortization of capitalized software
and third party software license fees. Cost of software licensing and related
services was $17.4 million for the year ended December 31, 2001 and $4.5 million
for the year ended December 31, 2000. The increase was primarily due to
personnel and third party contractors costs related to our Converge contract.
27

Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits, consulting expenses and related
expenditures. Research and development expenses were $27.0 million for the year
ended December 31, 2001 and $34.2 million for the year ended December 31, 2000.
Expenses decreased by:

- $1.7 million for salaries and benefits; and

- $5.5 million for consulting and other related expenditures.

This decrease in research and development expenses resulted primarily from
staffing reductions designed to eliminate redundant positions and streamline our
development processes, as well as a company-wide initiative to reduce the use of
external consultants.

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 $63.4 million for the year ended
December 31, 2001 and $80.6 million for the year ended December 31, 2000.
Expenses decreased by:

- $12.2 million for advertising, including barter expense;

- $4.2 million for salaries, commissions and benefits; and

- $0.8 million for other expenditures.

This decrease resulted primarily from staffing reductions as well as an
overall initiative to reduce costs.

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 $49.6 million for the year ended
December 31, 2001 and $56.9 million (including $5.6 million of nonrecurring
items related to terminated deal costs and obsolete software) for the year ended
December 31, 2000. Expenses increased (decreased) by:

- $(4.1) million for salaries and benefits;

- $(3.4) million for professional fees;

- $4.9 million for facility costs; and

- $(4.7) million for other general and administrative costs.

This net decrease resulted primarily from staffing reductions as well as an
overall company-wide initiative to reduce costs. Higher facility costs resulted
from acquired businesses as well as facility expansions which were initially
started in fiscal year 2000.

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 issuance of warrants and Series A preferred stock to Microsoft (see Note 15
to our consolidated financial statements). The amortization period for goodwill
is 36 months and for other intangible assets it ranges from 24 to 36 months.
Amortization expense was $121.7 million and $139.8 million (including $3.8
million and $1.7 million of deferred cost amortization related to Microsoft) for
the year ended December 31, 2001 and 2000, respectively. The decrease in
amortization expense is primarily attributable to goodwill impairment charges
recorded during fiscal year 2001 (see Note 6 to our consolidated financial
statements).

Restructuring and Asset Impairment Charges. During the year ended December
31, 2001, we recorded a $345.5 million charge related to employee terminations,
facility closures and asset write-downs (see Note 6 to our consolidated
financial statements).

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

YEAR ENDED
DECEMBER 31,
----------------
2001 2000
------- ------
(IN MILLIONS)

Net gain (loss) on investments(1)........................... $ (3.8) $ 79.9
Impairment charge related to cost method, equity method and
available-for-sale investments(2)......................... (231.3) (6.4)
Conversion inducement payment(3)............................ -- (11.2)
Equity in loss from affiliates.............................. (2.3) (2.8)
Other income (expense) items................................ 1.1 --
------- ------
Other income (expense), net............................ $(236.3) $ 59.5
======= ======

---------------
(1) We invested $1.0 million 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 due to a dispute under the
Agreement and Plan of Reorganization. In March 2001, we wrote off the
remaining shares held in escrow which resulted in a $2.2 million loss on
investment (see Note 9 to our consolidated financial statements). Additional
losses on investments during 2001 related to sales of other
available-for-sale investments.

(2) This write-down includes a $207.2 million impairment to our cost method
investment in Converge (see Note 9 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 (see Note 12 to our
consolidated financial statements).

In-Process Research and Development Charge. In December 2001, we incurred
a one-time in-process research and development charge of $0.4 million in
connection with our acquisition of Atlas Commerce (see Note 4 to our
consolidated financial statements).

Interest Income (Expense), Net. Net interest income was $38,000 and $2.6
million (net of $3.8 million and $3.5 million of expense) for the year ended
December 31, 2001 and 2000, respectively. Interest income decreased as a result
of lower cash balances and interest rates in 2001.

Preferred Stock Dividends. For the year ended December 31, 2001, preferred
stock dividends and accretion were approximately $7.4 million. As of December
31, 2001, cumulative dividends of $10.9 million have been earned by Microsoft,
the holder of our Series A preferred stock. Through December 31, 2001, dividends
of $9.3 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 December 31, 2001. The dividends may be paid in cash, additional shares of
Series A preferred stock or common stock, at our option. The preferred stock
dividend amount also includes approximately $1.0 million of accretion.

January 1, 2002 forward, as a discontinued operation. Such presentation requires
that all elements of revenue and expense be netted as a single line item to
report net results of operations. As a result, revenues and expenses of our SMB
business will no longer be separately presented in our financial statements. We
are currently in the process of resolving these matters with the SEC and believe
the historical classifications of revenue and expense for the SMB business are
appropriate. As of the date of this filing, we cannot provide assurance that the
SEC will declare the Form S-3 effective without us first amending the reports
that are incorporated into the S-3. The remaining open SEC comments do not
relate in any way to our ongoing collaborative supply chain software operations.

RESULTS OF CONTINUING OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND
DECEMBER 31, 1999

The following discussion and comparison regarding results of continuing
operations do not reflect the results of NECX.

Revenues. Revenues were $112.5 million for the year ended December 31,
2000 and $18.4 million for the year ended December 31, 1999.

Revenues from the SMB group, which include e-enablement, e-commerce,
advertising and other services, were $104.6 million for the year ended December
31, 2000 and $18.4 million for the year ended December 31, 1999. The increase in
revenues resulted primarily from:

- the Microsoft commercial agreement, which was primarily responsible for
the increase in the number of storefronts on our e-marketplaces from
approximately 2,900 as of December 31, 1999 to approximately 18,700 as of
December 31, 2000; and

- additional revenues generated by our horizontal business services, such
as asset remarketing, training and education and career services.

Microsoft was our largest SMB customer during the year ended 2000,
resulting in approximately $30.5 million in revenue, or 29%, of our total SMB
revenues. At December 31, 2000 and 1999, we had deferred revenues from the SMB
group of $50.6 million and $9.8 million, respectively. Our deferred revenue
balance at December 31, 2000 is primarily associated with e-enablement and
advertising revenue of which approximately $37.1 million relates to our
commercial arrangement with Microsoft.

Revenues from the Enterprise group, which include software licensing and
related services, were $7.9 million for the year ended December 31, 2000. This
new business unit was created by the acquisition of Tradeum in March 2000, so
there were no revenues for this business unit for the year ended December 31,
1999. At December 31, 2000, we had deferred revenue of $6.7 million from the
Enterprise group.

Cost of E-enablement, E-commerce, Advertising and Other Services. Cost of
e-enablement, e-commerce, advertising and other services revenues was $39.3
million for the year ended December 31, 2000 and $8.6 million for the year ended
December 31, 1999. Expenses increased by:

- $11.5 million for salaries and benefits of operating and editorial
personnel;

- $9.0 million for direct product costs; and

- $10.2 million for other related operating costs.

Increases were primarily attributable to additional personnel and direct
product costs. Additional personnel were required to provide services to an
increased number of customers as a result of our Microsoft arrangement, as well
as maintaining the increasing number of features and functionalities that had
been added to our e-marketplaces and horizontal business services. Direct
product costs increased due to our growth in the asset remarketing and training
and education businesses in which, under certain circumstances, we took title to
the goods being sold.

Cost of Software Licensing and Related Services. Cost of software
licensing and related services revenues was $4.5 million for the year ended
2000.

Research and Development Expenses. Research and development expenses were
$34.2 million for the year ended December 31, 2000 and $7.4 million for the year
ended December 31, 1999. Expenses increased by:

- $14.1 million for salaries and benefits;

- $8.1 million for consulting expenses; and

- $4.6 million for other expenditures.

This increase in research and development expenses resulted primarily from
increased staffing and consulting costs to develop and enhance the features,
content and services of our e-marketplaces, as well as developing software
products related to our SMB community building technology and development of the
acquired technology of Tradeum and Isadra.

Sales and Marketing Expenses. Sales and marketing expenses were $80.6
million for the year ended December 31, 2000 and $25.3 million for the year
ended December 31, 1999. Expenses increased by:

- $29.4 million for advertising, including barter expense;

- $18.5 million for salaries, commissions and benefits; and

- $7.4 million for travel and entertainment expenses (including trade show
attendance) and other expenses.

These increases resulted primarily from an increased number of sales and
marketing personnel across our business units, increased sales commissions and
increased expenses related to promoting the new businesses and services we had
acquired or created.

General and Administrative Expenses. General and administrative expenses
were $56.9 million (including $5.6 million of non-recurring items related to
terminated deal costs and obsolete software) for the year ended December 31,
2000 and $10.6 million for the year ended December 31, 1999. Expenses increased
by:

- $17.5 million for salaries and benefits;

- $7.4 million for professional fees;

- $5.3 million for facility costs; and

- $16.1 million for other general and administrative costs, including
non-recurring items.

These increases resulted primarily from increased staffing levels, higher
facility costs, including those incurred as a result of acquired businesses, and
professional fees to support the growth of our infrastructure and business
operations.

Amortization Expense. Amortization expense was $139.8 million (including
$1.7 million of deferred cost amortization related to Microsoft) for the year
ended December 31, 2000 and $6.8 million for the year ended December 31, 1999.
The increase in amortization expense is primarily attributable to the
acquisitions we completed during the year ended December 31, 2000.

Goodwill Impairment. We recorded an impairment charge of approximately
$11.5 million in 2000 related to goodwill based on our analysis of projected
undiscounted cash flows (see Note 6 to our consolidated financial statements).

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 (see Note 4 to our consolidated
financial statements).

Other Income and Expenses. For the year ended December 31, 2000, other
income (expenses) includes:

(IN MILLIONS)

Net gain on investment(1)................................... $ 79.9
Conversion payment to debt holders(2)....................... (11.2)
Impairment charge related to cost method investments(3)..... (6.4)
Equity in loss of affiliates................................ (2.8)
------
$ 59.5
======

---------------
(1) We invested $1.0 million in Tradex in July 1999. In March 2000, Tradex was
acquired by Ariba and we received 566,306 shares of Ariba 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
(see Note 9 to our consolidated financial statements).

(2) 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 the debt holders (see Note 12 to our
consolidated financial statements).

(3) We recorded an impairment charge of $6.4 million for an other than temporary
decline in the fair value of cost method investments (see Note 9 to our
consolidated financial statements).

Interest Income, Net. Interest income, net of expense, includes income
from temporarily invested cash and cash equivalents and from investments and
expenses related to our financing obligations. Net interest income was $2.6
million (net of $3.5 million of expense) for the year ended December 31, 2000
and $1.3 million (net of $2.1 million of expense) for the year ended December
31, 1999. Interest income increased as a result of the cash we received from the
issuance of Series A preferred stock in April 2000 and the forward sale of our
Ariba investment in July 2000 (see Note 9 to our consolidated financial
statements). 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 because of our outstanding
convertible debt.

Preferred Stock Dividends. For the year ended December 31, 2000, preferred
stock dividends and accretion were approximately $5.3 million. As of December
31, 2000, cumulative dividends of $4.5 million have been earned by the holder of
our Series A preferred stock. In August 2000, dividends of $1.5 million were
paid to Microsoft through the issuance of additional shares of our Series A
Preferred Stock. The remaining $3.0 million remains payable as of December 31,
2000. The dividends may be paid in cash, additional shares of Series A Preferred
Stock or common stock, at our option. The preferred stock dividend amount also
includes approximately $0.8 million of accretion.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain results of operations data for the
eight quarters ended between March 31, 2000 and December 31, 2001. The
information for each quarter has been prepared on the same basis as the
consolidated financial statements appearing elsewhere in this report and, in the
opinion of management, includes all adjustments necessary for a fair
presentation of the results of operations for such periods. Historical results
are not indicative of the results to be expected in the future, and the results
of the interim periods are not indicative of results of any future period.

THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

Revenues................... $ 12,863 $ 24,445 $ 34,455 $ 40,690
Operating loss............. (32,412) (73,125) (73,176) (85,635)
Income (loss) from
continuing operations
attributable to common
shareholders............. 46,699 (84,217) (76,082) (93,994)
Income (loss) from
discontinued
operations............... (4,606) (2,931) 68 (19,549)
Loss on disposal of
discontinued
operations............... -- -- -- (81,968)
Income (loss) attributable
to common shareholders,
including effect of
preferred stock dividends
and accretion............ 42,093 (87,148) (76,014) (195,511)
Basic net income (loss) per
share
Continuing operations.... $ 0.62 $ (1.01) $ (0.88) $ (1.07)
Discontinued
operations............. (0.06) (0.04) -- (0.23)
Estimated loss on
disposal of
discontinued
operations............. -- -- -- (0.93)
-------- -------- -------- ---------
$ 0.56 $ (1.05) $ (0.88) $ (2.23)
======== ======== ======== =========
Diluted net income (loss)
per share
Continuing operations.... $ 0.49 $ (1.01) $ (0.88) $ (1.07)
Discontinued
operations............. (0.04) (0.04) -- (0.23)
Estimated loss on
disposal of
discontinued
operations............. -- -- -- (0.93)
-------- -------- -------- ---------
$ 0.45 $ (1.05) $ (0.88) $ (2.23)
======== ======== ======== =========

THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
--------- --------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

Revenues................... $ 36,687 $ 33,056 $ 31,755 $ 24,072
Operating loss............. (80,783) (287,684) (40,001) (112,169)
Income (loss) from
continuing operations
attributable to common
shareholders............. (91,644) (302,481) (241,649) (128,595)
Income (loss) from
discontinued
operations............... -- -- -- --
Loss on disposal of
discontinued
operations............... (522) (3,381) -- --
Income (loss) attributable
to common shareholders,
including effect of
preferred stock dividends
and accretion............ (92,166) (305,862) (241,649) (128,595)
Basic net income (loss) per
share
Continuing operations.... $ (0.99) $ (3.10) $ (2.46) $ (1.30)
Discontinued
operations............. -- -- -- --
Estimated loss on
disposal of
discontinued
operations............. -- (0.03) -- --
-------- --------- --------- ---------
$ (0.99) $ (3.13) $ (2.46) $ (1.30)
======== ========= ========= =========
Diluted net income (loss)
per share
Continuing operations.... $ (0.99) $ (3.10) $ (2.46) $ (1.30)
Discontinued
operations............. -- -- -- --
Estimated loss on
disposal of
discontinued
operations............. -- (0.03) -- --
-------- --------- --------- ---------
$ (0.99) $ (3.13) $ (2.46) $ (1.30)
======== ========= ========= =========

Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future. In addition,
the results of any quarter do not indicate results to be expected for a full
fiscal year. Finally, our annual or quarterly results of operations may be below
the expectations of public market analysts or investors, in which case the
market price of our common stock could be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 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 December 31, 2001, we had cash and cash
equivalents and short-term investments totaling $50.3 million, compared to
$145.2 million at December 31, 2000. At December 31, 2001 we had negative
working capital of $26.6 million.

Net cash used in operating activities was $72.0 million for the year ended
December 31, 2001. Net cash used in operating activities consisted primarily of
net operating losses and a decrease in accrued expenses,

accounts payable and deferred revenue, offset by decreases in accounts
receivable and prepaid expenses and other assets.

Net cash used in investing activities was $15.2 million for the year ended
December 31, 2001. Cash provided by investing activities include $21.5 million
for the sale and maturities of available-for-sale securities, $0.5 million for
the sale of assets and $7.2 million for the release of previously restricted
funds. Cash used in investing activities included capital expenditures and
capitalized software costs of $14.8 million, business acquisitions net of cash
acquired of $26.6 million, and investments made in companies accounted for under
the equity or cost method, net of cash received from liquidation, of $2.9
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 $13.6 million for the year
ended December 31, 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 $1.4 million. Cash used in financing activities includes
principal payments on capital leases of $2.8 million.

As of December 31, 2001, we have approximately $5.1 million of accrued
restructuring costs related to facility leases, $0.5 million of which were
assumed as part of the Atlas Commerce acquisition. We have made significant
efforts to estimate the expected costs to early terminate the leases or sublease
facilities. If these facilities can not be sublet or the leases early
terminated, our contractual lease payments of approximately $13.5 million
related to these leases will be due over the respective lease terms in addition
to aggregate contractual lease payments of approximately $3.3 million related to
facilities we continue to use.

We are a party to a put/call agreement with British Telecommunications, plc
("BT") whereby we can purchase 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/call price of
approximately $13.6 million is included in other current liabilities on the
consolidated balance sheet as of December 31, 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. In February 2002 we agreed with BT to amend
the put/call agreement to allow for an early partial exercise of our call using
our common stock. As of March 15, 2002, we have issued 2,000,000 shares of our
common stock to BT with an aggregate value of approximately $1.8 million towards
the put/call obligation. As of March 15, 2002, our put/call liability is
approximately $11.8 million (see Note 11 to our consolidated financial
statements).

Our capital lease obligations of approximately $1.9 million are payable in
the following amounts: $1.3 million, $0.4 million, and $0.2 million during the
years ended December 31, 2002, 2003 and 2004, respectively (see Note 12 to our
consolidated financial statements).

In September and October of 1999, we completed the sale of an aggregate of
$115.0 million of 5 1/4% convertible subordinated debentures in a private
placement transaction pursuant to Section 4(2) of the Securities Act of 1933, as
amended, resulting in net proceeds of $110.9 million. The debentures have a
maturity date of September 27, 2004, with semi-annual interest payments due on
March 27 and September 27 of each year beginning on March 27, 2000. The
debentures are convertible into shares of our common stock at an initial
conversion price of $20 per share, subject to adjustment under certain
circumstances. Approximately $93.3 million of the debentures were converted into
shares of our common stock in April 2000. Our outstanding convertible debt as of
December 31, 2001 is approximately $21.7 million (see Note 12 to our
consolidated financial statements).

As of March 15, 2002, we anticipate receiving the remaining contractual
payments of approximately $6.2 million due from Converge under the amended and
restated agreements during the year ended December 31, 2002. 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.

During 2001, our available cash, cash equivalent and short-term investments
resources declined by approximately $95.0 million, principally as a result of
continued operating losses. Accounts receivable also declined by approximately
$30.0 million in 2001 to a balance of less than $2.0 million as of December 31,
2001. Cash flows from two significant customers, Microsoft and Converge, were
instrumental in financing our business during 2001. As of December 31, 2001, the
Microsoft contractual arrangements have been terminated and anticipated cash
flows under the Converge contractual arrangements have been significantly
curtailed (see Note 10 to our consolidated financial statements). As a result,
we will become increasingly dependent on generating revenues and operating cash
flows from new customers in 2002.

We believe that 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.
However, to the extent our current level of liquid assets proves to be
insufficient, we may need to obtain additional debt or equity financing.
Additionally, we may, if the capital markets present attractive opportunities,
raise cash through the sale of debt or equity. We can provide no assurance that
our liquid assets will be sufficient to fund our operations or that we will be
successful in obtaining any required or desired financing either on acceptable
terms or at all.

Should funding not be available on acceptable terms, we may implement
additional cost reduction initiatives, including headcount reduction. While such
initiatives may enable us to continue to satisfy our short-term obligations and
working capital requirements, they may negatively impact our ability to
successfully execute our business plan over the longer term.

ACQUISITIONS

2001 Acquisitions

During the year ended December 31, 2001, in addition to the Atlas Commerce
acquisition previously mentioned, we completed two additional acquisitions,
including Net Commerce and Plasticsnet. The aggregate purchase price of these
acquisitions was approximately $2.0 million in cash. These acquisitions were
accounted for as purchases and the excess of the purchase price over the fair
value of net assets acquired of approximately $2.2 million was allocated to
goodwill and other intangibles. The results of operations from these
acquisitions were not material to our financial position or results of
operations.

Tradeum

On March 23, 2000, we acquired all of the outstanding capital stock of
Tradeum, Inc. ("Tradeum") for approximately $453.1 million, including
transaction costs. The consideration included 2,573,837 shares of our common
stock, valued at approximately $325.0 million and 1,426,148 employee options to
purchase our common stock, valued as of the date of acquisition at approximately
$122.6 million, based on an independent valuation. A portion of the common stock
given as consideration was reduced by an illiquidity discount based on
restrictions detailed in the lock up agreements signed by the individuals
receiving the stock. The acquisition was accounted for as a purchase and the
excess of the purchase price over the fair value of the tangible net assets
acquired of approximately $452.6 million was allocated to in-process research
and development, existing technology, assembled workforce and goodwill in the
amounts of approximately $10.0 million, $7.0 million, $1.0 million and $434.6
million, respectively. The $10.0 million was charged to expense as a
non-recurring charge upon consummation of the acquisition since the in-process
research and development had not yet reached technological feasibility and had
no alternative future use. The existing technology, assembled workforce and
goodwill were being amortized on a straight-line basis over 36 months. As of
December 31, 2001, all goodwill and intangible assets related to the Tradeum
acquisition have been impaired and written off (see Note 6 to our consolidated
financial statements).

Verticalnet Europe

In June 2000, we formed Verticalnet Europe, a joint venture with BT and
Internet Capital Group, Inc. ("ICG"). The joint venture was funded with 109.5
million Euros (approximately $114.7 million as of the closing date) from the
three partners. We contributed to Verticalnet Europe approximately $6.8 million
in cash and intellectual property independently valued at approximately $120.0
million for the operation of e-marketplaces within Europe in exchange for a 56%
ownership interest in Verticalnet Europe. Additionally, Verticalnet Europe and
BT created Verticalnet UK Ltd. as part of the joint venture agreement.

Our ownership of Verticalnet Europe increased from 56% to 72% on December
29, 2000 when Verticalnet Europe redeemed some of its shares held by BT. Due to
minority shareholder governance provisions in the original agreement, we were
previously accounting for Verticalnet Europe using the equity method. As a
result of our increased ownership, certain governance provisions regarding
minority shareholders were amended to give us control over Verticalnet Europe's
operations. Accordingly, we consolidated Verticalnet Europe in our consolidated
balance sheet at December 31, 2000 and began consolidating Verticalnet Europe's
operations starting January 1, 2001. The increase in ownership was accounted for
as a purchase and the estimated excess of the purchase price over the fair value
of the tangible net assets acquired of approximately $3.4 million was allocated
to goodwill. Additionally, in December 2000 Verticalnet Europe obtained full
ownership of Verticalnet UK Ltd.

During the three months ended March 31, 2001, our percentage ownership of
Verticalnet Europe increased to approximately 90%. Verticalnet Europe redeemed a
portion of its shares held by ICG, and ICG sold the remaining portion directly
to us for approximately $2.3 million in cash. We also purchased a portion of
BT's ownership of Verticalnet Europe for approximately $6.4 million in cash and
4,993,173 shares of our common stock. The shares of common stock issued to BT
were registered under our acquisition shelf registration statement. We also
entered into a put/call agreement with BT whereby we can buy their remaining 10%
interest in Verticalnet Europe at any time after closing and BT may sell its
investment to us at any time after March 13, 2002 (see Notes 11 and 22 to our
consolidated financial statements). The increase in ownership was accounted for
as a purchase and the estimated excess of the purchase price over the fair value
of the tangible net assets acquired of approximately $20.0 million was allocated
to goodwill and was being amortized over 36 months. As of December 31, 2001 all
goodwill related to the Verticalnet Europe acquisition has been impaired and
written off (see Note 6 to our consolidated financial statements).

Other 2000 Acquisitions

During the year ended December 31, 2000, we completed six additional
acquisitions, including Career Mag, Leasend, J.M. Computer Services, BidLine,
FedAmerica and Oralis. The aggregate purchase price of these acquisitions was
approximately $5.3 million in cash and 474,060 shares of common stock valued at
approximately $36.8 million. These acquisitions were accounted for as purchases
and the excess of the purchase price over the fair value of tangible net assets
acquired of approximately $41.6 million was allocated to goodwill and other
intangibles. The results of operations from these acquisitions were not material
to our financial position or results of operations.

Isadra

the in-process research and development had not yet reached technological
feasibility and had no alternative future use (see Note 4 to our consolidated
financial statements). The existing technology and assembled work force were
amortized on a straight-line basis over 24 months, while goodwill is being
amortized on a straight-line basis over 36 months.

Other 1999 Acquisitions

During the year ended December 31, 1999, we completed nine additional
acquisitions, including Safety Online, Techspex, Oillink, ElectricNet, LabX
Technologies, Industry OnLine, CertiSource, GovCon and TextileWeb. The aggregate
purchase price for these acquisitions was approximately $3.9 million in cash and
781,488 shares of common stock valued at approximately $27.9 million. These
acquisitions were accounted for as purchases and the excess of the purchase
price over the fair value of the tangible net assets acquired of approximately
$33.0 million was allocated to goodwill and other intangibles. The results of
operations from these acquisitions were not material to our financial position
or results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

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 is 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.

As of January 1, 2002, the adoption date of SFAS No. 142, the remaining
unamortized goodwill and identifiable intangible assets of $27.6 million and
$3.2 million, respectively, will be subject to the transition provisions of SFAS
Nos. 141 and 142. Amortization expense related to goodwill and other intangible
assets was approximately $119.1 million, $146.8 million and $6.8 million for the
years ended December 31, 2001, 2000 and 1999, 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 as of the date of this report.

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, 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 of 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.

FACTORS AFFECTING OUR BUSINESS CONDITION

RISKS RELATED TO OUR CONTINUING OPERATIONS

We may require additional capital for our operations and obligations, which
we may not be able to raise or, even if we do, could be dilutive to 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 uncertainty. There is no
assurance that our 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 are ultimately unable, for any reason, to receive cash payments
expected from our customers, in particular scheduled payments from Converge, our
business, financial condition and results of operations will be materially and
adversely affected. We also have a 15.4 million Euro (approximately $13.6
million as of December 31, 2001) put/call agreement with British
Telecommunications whereby BT has the right to sell its remaining investment in
Verticalnet Europe beginning in March 2002. In February 2002 we agreed with BT
to amend the put/call agreement to allow for an early partial exercise of our
call using our common stock. As of March 15, 2002, we have issued 2,000,000
shares of our common stock to BT with an aggregate value of approximately $1.8
million towards the put/call obligation. Our ability to continue to use our
stock to pay this obligation may be limited by our stock price and trading
volume, so we may have to use cash to satisfy some or substantially all of this
obligation, which could increase our need to obtain additional financing.

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 an operating profit.

As of December 31, 2001, our accumulated deficit was in excess of $1.1
billion. For the year ended December 31, 2001, we sustained a $768.3 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.

The revenues and operating results of our SMB unit will no longer be
reported in the results from continuing operations beginning in the first
quarter of 2002.

For the year ended December 31, 2001, $90.0 million, or approximately 72%
of our overall revenues, were generated primarily from sales of storefronts,
marketplace managers and advertising on our SMB unit's industry marketplaces.
Because the SMB unit will be treated as a discontinued operation, we will not
report future revenues from the SMB unit as part of our continuing operations.
As a result of our decision to sell the SMB unit, we anticipate that the
composition of our reported revenues will change substantially in future
periods. Beginning in 2002, we will be increasingly dependent on generating
revenues from enterprise software licensing and professional services. In the
foreseeable future, we may not be able to generate revenues from our continuing
operations at the levels we did when we included the revenues of the SMB unit in
our continuing operations.

If the business, revenues and operating results of our SMB unit decline
prior to a sale of that business, it could delay or impede our ability to sell
the SMB unit, which would negatively impact our cash flow and increase our net
loss.

We announced on February 13, 2002, that we intend to sell the SMB unit and
will treat it for accounting purposes as a discontinued operation in the first
quarter of 2002, based on our expectation that we will sell that business within
a reasonable period of time. Although the results of operations of the SMB unit
will not be included in our operating results from continuing operations after
2001, we will report the net loss from the SMB unit as discontinued operations
on a quarterly basis in determining our total net loss, and we will continue to
fund any net cash used in the SMB unit until we complete the sale of the
business. If the financial performance of the SMB unit declines, then it could
be more difficult for us to sell the SMB unit at an acceptable purchase price,
or it could significantly delay our ability to complete a sale. If we continue
to own the SMB unit for an extended time period during which its financial
performance declines significantly or it has significant unexpected cash needs,
then our total net loss and cash flows could be negatively impacted.

We may not develop significant revenues from enterprise software licensing
and professional services, which could adversely affect our future revenue
growth and ability to achieve profitability.

If we do not develop and consistently generate significant revenues from
enterprise software licensing and professional services, our business, financial
condition and operating results will be impaired. Our ability to generate
software revenues depends on the overall demand for enterprise software
solutions and professional services, as well as general economic and business
conditions. Suppressed demand for software solutions and services caused by a
weakening economy and reduced levels of spending on technology solutions 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 professional 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 expense reductions and layoffs throughout 2001 may not have
sufficiently reduced our ongoing operating expenses to a level necessary to
achieve operating profits. If we cannot further reduce our expenses, some of
which are fixed, including those related to non-cancelable agreements, equipment
leases and real estate leases, then our operating results will suffer. 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. Our quarterly operating results will be substantially
dependent on software licenses booked and delivered in that quarter. Any delay
in the recognition of revenue for any of our license transactions could cause
significant variations in our quarterly operating results and could cause our
revenues to fall significantly short of anticipated levels. We also expect that
our quarterly operating results will fluctuate significantly due to other
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; and

- risks associated with past and future acquisitions.

We may be unable to maintain our listing on the Nasdaq National Market,
which could cause our stock price to fall and decrease the liquidity of our
common stock.

Our common stock is currently listed on the Nasdaq National Market, which
has requirements for the continued listing of stock. One of the continued
listing requirements is that our common stock maintain a minimum bid price of
$1.00 per share. Since August 2001, the bid price for our common stock has
dropped below $1.00 during extended periods. If our common stock trades below
$1.00 for 30 consecutive trading days, or if we fail to meet any of the other
listing requirements, our common stock may be delisted from the Nasdaq National
Market and the trading market for our common stock could decline, which could
depress our stock price and adversely affect the liquidity of our common stock.

We anticipate lengthy sales and implementation cycles for our software
products.

We anticipate the sales cycles for our enterprise software products 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 software
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 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 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 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 that are 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 software products and services are intensely
competitive, which may result in low or negative profit margins and difficulty
in achieving market share, either of which could seriously harm our business. We
expect the competition in our markets to remain intense and to increase. 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 are exposed to risks associated with decreases in the fair value, or a
complete loss, of our equity investments.

We may invest in equity instruments of privately-held companies for
business and strategic purposes. Such items are included in other investments on
our balance sheet. As of December 31, 2001, we held cost method investments of
$10.6 million, of which our Converge investment was $7.8 million. We may never
realize any return on our equity interests in Converge or these other entities,
or we may suffer a complete loss of these equity interests, which could
materially and adversely affect our business, financial condition and operating
results. In addition, our quarterly results may be materially reduced if we
determine that an impairment 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 year ended December 31, 2001, we
recorded an aggregate of $231.3 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, $207.2 million of which was a
write-down of our investment in Converge.

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 we do not develop the "Verticalnet" brand in the enterprise software
industry, our revenues might not increase.

To be successful, we must establish and continuously strengthen the
awareness of the "Verticalnet" brand in the enterprise software industry. If our
brand awareness as a maker of enterprise software does not develop, or if
developed, is not sustained as a respected brand, it could decrease the
attractiveness of our products and services to potential customers, which could
result in decreased revenues.

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 December
31, 2001, Internet Capital Group beneficially owned 25,318,644 shares, or
approximately 22.3%, 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 business opportunities. 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 director, may deter companies from partnering
with us and may limit our business opportunities.

Internet Capital Group may have to buy or sell our stock to avoid
registration under the Investment Company Act of 1940, which may negatively
affect our stock price.

To avoid registration under the Investment Company Act of 1940, Internet
Capital Group may need to continue to own more than 25% of our voting securities
and to continue to have a representative on our board of directors. Under the
Investment Company Act, a company is considered to control another company if it
owns more than 25% of that company's voting securities and is the largest
stockholder of such company. A company may be required to register as an
investment company if more than 45% of its total assets consist of, and more
than 45% of its income/loss and revenue attributable to it over the last four
quarters is derived from, ownership interests in companies it does not control.
Internet Capital Group has publicly stated that it is not feasible to be
regulated as an investment company because the Investment Company Act rules are
inconsistent with their corporate strategy. As of December 31, 2001, Internet
Capital Group's ownership interest in us was 22.3%. On March 15, 2002, Internet
Capital Group filed a Schedule 13D stating that it had increased its beneficial
ownership in us to 35,841,747, or 31.6% of our common stock, because it had
reached an agreement with Safeguard Scientifics that provides it with the right
of first refusal to purchase the 10,523,103 shares of our stock that Safeguard
owns. 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% to avoid having to register as an investment company. The possible
need of Internet Capital Group to maintain a
42

25% ownership position could adversely influence its decisions regarding actions
that may otherwise be in the best interests of our public shareholders. 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, it could adversely affect our common stock's market price.

Our success depends on our key management and experienced software
personnel, whom we may not be able to retain or hire.

We believe that our success depends on continued employment of our senior
management team and on having a highly trained research and development staff,
sales force and professional service organization. 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. If we are unable to retain or hire trained
technical personnel and experienced software sales and service professionals, it
could limit our ability to design, develop and implement our products, or
increase sales of our products and services. Ultimately, our business, financial
condition and operating results will be impaired if we cannot hire and retain
suitable personnel.

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. Although we file copyright registrations for the source code
underlying our software, enforcement of our rights might be too difficult and
costly for us to pursue effectively. We have filed patent applications for the
proprietary technology underlying our software, but our ability to fully protect
this technology is contingent upon the ultimate issuance of the corresponding
patents. Effective patent, copyright and trade secret protection of our software
may be unavailable or limited in certain countries.

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
stock in 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 that 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 may not have sufficient cash flow from operations to service our debt.

As of December 31, 2001, we had approximately $24.9 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.

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 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 March 15, 2002, the holders
of 42,151,578 shares of common stock (which includes the 14,157,630 shares
issued in the acquisition of Atlas Commerce), warrants to purchase 2,127,038
shares of common stock and 110,930 shares of Series A preferred stock, which are
convertible into approximately 1,276,890 shares of common stock, have demand
and/or piggyback registration rights. The exercise of such rights could
adversely affect the market price of our common stock. We also 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 market for stocks of technology companies has been highly volatile
since our initial public offering in 1999. Throughout this period, the market
price of our common stock has reached extreme highs and lows, and our daily
trading volume has been, and will likely continue to be, highly volatile.
Investors may not be able to resell their shares of our common stock following
periods of price or trading volume volatility because of the market's adverse
reaction to such volatility. Factors that could cause volatility in our stock,
in some cases regardless of our operating performance, include, among other
things:

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

- 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.

We have not yet cleared all of the SEC's comments relating to our recent
filing.

In connection with our acquisition of Atlas Commerce, we filed a
registration statement on Form S-3 with the SEC registering shares of our common
stock issued to acquire Atlas Commerce. In connection with a routine review and
comment letter process related to this filing, we have received comments from
the SEC. The remaining open comments relate primarily to the classification of
certain previously reported revenue and expense items of our SMB business and
therefore, we do not believe the ultimate resolution of such comments will
change our previously reported cumulative net loss. As previously announced on
February 13, 2002, we intend to sell our SMB business, and accordingly that
business will be accounted for prospectively from January 1, 2002 forward, as a
discontinued operation. Such presentation requires that all elements of revenue
and expense be netted as a single line item to report net results of operations.
As a result, revenues and expenses of our SMB business will no longer be
separately presented in our financial statements. We are currently in the
process of resolving these matters with the SEC and believe the historical
classifications of revenue and expense for the SMB business are appropriate. As
of the date of this filing, we cannot provide assurance that the SEC will
declare the Form S-3 effective without us first amending the reports that are
incorporated into the S-3.

The remaining open SEC comments do not relate in any way to our ongoing
collaborative supply chain software operations.

To the extent we are required to amend the filings in a manner that is
inconsistent with the presentation in our previous filings, including our
financial statements, our business and the market price of our common stock
could be materially and adversely affected.

RISKS RELATED TO OUR SMALL/MEDIUM BUSINESS UNIT THAT WE INTEND TO SELL, WHICH
THEREFORE WILL BE TREATED FOR ACCOUNTING PURPOSES AS A DISCONTINUED OPERATION
AFTER 2001.

If we are unable to provide new customer leads to the suppliers, buyers and
other users of our industry marketplaces, it may negatively impact the operating
results of our SMB unit.

The success of our SMB unit depends on our ability to provide sales leads
to the suppliers, buyers and other users of our industry marketplaces. If we are
unable to attract buyers to visit our industry marketplaces then they will be
unlikely to leave sales leads for our suppliers. If we are unable to
consistently provide sales leads to suppliers, they will be unlikely to purchase
or renew our marketplace manager tools. If suppliers have an unsatisfactory
experience receiving sales leads, we would have difficulty in cross-marketing to
them to leave sales leads in buying for their own businesses from other
suppliers. If the sales leads that suppliers do receive are of such poor quality
that they consistently fail to result in sales, then they will be unlikely to
purchase or renew our marketplace manager tools.

The success of our SMB unit depends on the development of alliances with
third-party marketplaces to drive additional leads to our suppliers, which is
uncertain.

The success of the SMB unit depends in part upon our ability to drive more
leads to our suppliers by syndicating our suppliers' content into industry
marketplaces maintained by other parties. We expect to rely increasingly on
alliances with third-party marketplaces to syndicate our suppliers' content into
other industry marketplaces. Our failure to maintain relationships and build new
ones with third-party industry marketplaces. could result in our failure to
provide leads to our suppliers.

If we cannot generate new revenues from the sale of marketplace manager
products, then our SMB business would suffer.

Our SMB unit currently relies for a material part of its revenues on the
sale of our marketplace manager tool, which helps customers generate sales leads
on our industry marketplaces. If we are not able to increase our level of new
revenues from marketplace manager sales, our SMB business may suffer. Our
ability to increase our new sales or renewals of our marketplace manager tools
depends on many factors, including, without limitation:

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

- acceptance of the Internet as a legitimate, effective and measurable
medium for business-to-business activity;

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

- our ability to develop effective marketing programs and build
relationships with third-party providers to help generate sales leads.

The content on our SMB unit industry marketplaces may not attract a
significant number of users with demographic characteristics valuable to
suppliers.

The future success of the SMB unit depends in part upon our ability to
deliver compelling business content on our industry marketplaces that will
attract a significant number of buyers and other users with demographic
characteristics valuable to business suppliers. Our inability to deliver
business content that attracts a loyal buyer base with demographic
characteristics attractive to suppliers could impair the business, financial
condition and operating results of the SMB unit. 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 Internet sites, many of which offer
business 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, our SMB unit
industry marketplaces may not attract a significant number of users with
demographic characteristics that buyers and suppliers are seeking.

We may not be able to protect the proprietary rights of our SMB unit and
may infringe the proprietary rights of others.

Generally, our domain names for our SMB unit 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 for our
industry marketplaces, which makes it possible that we could become subject to
infringement actions based upon the content licensed from those third parties.

Our failure to maintain relationships with third-party content providers
may impair the operating results of our SMB unit.

We have relied on, and expect to rely increasingly on, third parties such
as news wires to provide content for our industry marketplaces. If we are unable
to maintain our relationships with third-party content providers, or replace
them with other content providers on comparable terms, then we could suffer
decreased traffic on, and customer leads through, our industry marketplaces.

We may be subject to legal liability for publishing or distributing content
on our industry marketplaces 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 SMB unit's 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET 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 December 31, 2001, our portfolio of investments
included $50.3 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 year ended December 31, 2001 would have
decreased by less than $0.5 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.

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
December 31, 2001 we hold cost method investments of approximately $10.6
million, of which our Converge investment is $7.8 million. For these investments
in privately-held companies, our policy is to regularly review
46

the assumptions underlying the operating performance and cash flow forecasts in
assessing the recoverability of the carrying values. We identify and record
impairment losses when events and circumstances indicate that such assets might
be impaired. During the year ended December 31, 2001, we recorded $219.2 million
of impairment charges for other than temporary declines in the fair value of
several of our cost method investments. Approximately $207.2 million of the
impairment charge was related to write-downs of our Converge investment, which
was initially valued at $215.0 million in January 2001. Since our initial
investments, 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 December 31, 2001, the fair market value of these marketable
equity securities included in short-term and long-term investments was $2.6
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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Consolidated Financial Statements:
Independent Auditors' Report.............................. 49
Consolidated Balance Sheets at December 31, 2001 and
2000................................................... 50
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999....................... 51
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... 52
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 2001, 2000 and 1999... 53
Consolidated Statements of Other Comprehensive Loss for
the years ended December 31, 2001, 2000 and 1999....... 55
Notes to Consolidated Financial Statements................ 56

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
and Shareholders of Verticalnet, Inc.:

We have audited the accompanying consolidated balance sheets of
Verticalnet, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations, cash flows, shareholders' equity
(deficit) and other comprehensive loss for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Verticalnet,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.

KPMG LLP

Philadelphia, Pennsylvania
February 12, 2002, except
for Note 22, which is as of
March 15, 2002

VERTICALNET, INC.

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

DECEMBER 31,
-------------------------
2001 2000
----------- ----------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 50,252 $ 123,803
Short-term investments.................................... 36 21,349
Accounts receivable, net of allowance for doubtful
accounts of $987 in 2001 and $2,072 in 2000............ 1,891 31,932
Prepaid expenses and other assets......................... 10,091 37,264
----------- ----------
Total current assets.............................. 62,270 214,348
----------- ----------
Property and equipment, net................................. 11,421 32,398
Net assets of discontinued operations....................... -- 215,000
Goodwill and other intangibles, net of accumulated
amortization of $24,462 in 2001 and $149,015 in 2000...... 30,775 388,341
Long-term investments....................................... 2,599 22,861
Other investments........................................... 10,831 17,543
Other assets................................................ 7,735 32,793
----------- ----------
Total assets...................................... $ 125,631 $ 923,284
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 3,919 $ 10,821
Accrued expenses.......................................... 25,528 67,251
Deferred revenues......................................... 44,483 57,323
Other current liabilities................................. 14,949 1,597
----------- ----------
Total current liabilities......................... 88,879 136,992
----------- ----------
Long-term debt.............................................. 550 952
Other long-term liabilities................................. 2,599 22,630
Convertible notes........................................... 21,705 21,705
----------- ----------
Total liabilities................................. 113,733 182,279
----------- ----------
Commitments and contingencies (see Notes 13 and 14)
Minority interest........................................... -- 40,843
----------- ----------
Series A 6.00% convertible redeemable preferred stock, $.01
par value issued 250,000 shares authorized, 109,290 shares
issued in 2001 and 101,450 shares in 2000 plus accrued
dividends of $1,639 in 2001 (liquidation value of
$109,290)................................................. 102,180 94,760
----------- ----------
Put arrangement involving common stock...................... 1,057 --
----------- ----------
Shareholders' equity (deficit):
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, 113,006,208 shares issued in 2001 and
88,047,949 shares issued in 2000....................... 1,130 880
Additional paid-in capital................................ 1,054,334 1,004,149
Deferred compensation..................................... (98) (363)
Accumulated other comprehensive loss...................... (959) (14,370)
Accumulated deficit....................................... (1,144,941) (384,089)
----------- ----------
(90,534) 606,207
Treasury stock, at cost 656,356 shares in 2001 and 2000... (805) (805)
----------- ----------
Total shareholders' equity (deficit).............. (91,339) 605,402
----------- ----------
Total liabilities and shareholders' equity
(deficit)....................................... $ 125,631 $ 923,284
=========== ==========

See accompanying notes to consolidated financial statements.
50

VERTICALNET, INC.

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

YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
--------- --------- --------

REVENUES:
E-enablement, e-commerce, advertising and other
services............................................... $ 89,962 $ 104,548 $ 18,428
Software licensing and related services.................. 35,608 7,906 --
--------- --------- --------
Total revenues........................................... 125,570 112,454 18,428
COSTS AND EXPENSES:
Cost of e-enablement, e-commerce, advertising and other
services............................................... 21,157 39,247 8,611
Cost of software licensing and related services.......... 17,354 4,503 --
Research and development................................. 27,037 34,178 7,396
Sales and marketing...................................... 63,421 80,578 25,303
General and administrative............................... 49,550 56,924 10,637
Amortization............................................. 121,726 139,841 6,814
Restructuring and asset impairment charges............... 345,542 11,530 --
In-process research and development charges.............. 420 10,000 13,600
--------- --------- --------
Operating loss........................................... (520,637) (264,347) (53,933)
--------- --------- --------
Other income (expense), net.............................. (236,350) 59,460 --
Interest income, net..................................... 38 2,557 1,344
--------- --------- --------
Net loss from continuing operations...................... (756,949) (202,330) (52,589)
Discontinued operations:
Loss from operations of the Verticalnet Exchanges
segment............................................. -- (27,018) (891)
Loss on disposal of the Verticalnet Exchanges
segment............................................. (3,903) (81,968) --
--------- --------- --------
Net loss................................................. (760,852) (311,316) (53,480)
Preferred stock dividends and accretion.................. (7,420) (5,264) --
--------- --------- --------
Loss attributable to common shareholders................. $(768,272) $(316,580) $(53,480)
========= ========= ========
Basic and diluted loss per common share:
Continuing operations.................................. $ (7.89) $ (2.50) $ (0.84)
Loss from discontinued operations...................... -- (0.32) (0.02)
Loss on disposal of discontinued operations............ (0.04) (0.99) --
--------- --------- --------
Loss per common share.................................. $ (7.93) $ (3.81) $ (0.86)
========= ========= ========
Weighted average common shares outstanding used in basic
and diluted per share calculation...................... 96,921 83,127 62,391
========= ========= ========

See accompanying notes to consolidated financial statements.
51

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------

Net loss.................................................... $(760,852) $(311,316) $ (53,480)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 135,622 147,286 8,086
Noncash restructuring charges............................. 37,475 -- --
Intangible asset impairment............................... 284,353 11,530 --
Write-down related to cost method, equity method and
available-for-sale investments.......................... 231,327 6,439 --
Other noncash charges..................................... 2,408 312 632
Loss on disposal of property and equipment................ 286 -- 31
Loss from equity method investments....................... 2,312 2,769 --
Loss on disposal of discontinued operations............... 3,903 81,968 --
Net loss (gain) on investments............................ 3,829 (79,875) --
In-process research and development charge................ 420 10,000 13,600
Discontinued operations -- working capital changes and
noncash charges......................................... -- 109,778 7,609
Change in assets and liabilities, net of effect of
acquisitions:
Accounts receivable....................................... 30,231 (21,172) (7,741)
Prepaid expenses and other assets......................... 15,200 (13,904) (6,874)
Accounts payable.......................................... (6,684) 5,495 528
Accrued restructuring charge expenses..................... 7,082 -- --
Other accrued expenses.................................... (46,521) 17,128 7,156
Deferred revenues......................................... (12,347) 47,146 7,033
--------- --------- ---------
Net cash provided by (used in) operating activities..... (71,956) 13,584 (23,420)
--------- --------- ---------
Investing activities:
Acquisitions, net of cash acquired........................ (26,616) 15,231 (61,898)
Purchase of available-for-sale investments................ -- (88,975) (195,043)
Purchase of cost and equity method company investments,
net of liquidation proceeds............................. (2,914) (19,011) (6,700)
Proceeds from sale and redemption of available-for-sale
investments............................................. 21,499 141,569 133,783
Advances.................................................. -- -- (965)
Restricted cash........................................... 7,165 (9,900) (1,220)
Proceeds from sale of assets.............................. 500 -- --
Capital expenditures...................................... (14,784) (28,972) (5,052)
Discontinued operations -- investing activities........... -- (38,008) (5,287)
--------- --------- ---------
Net cash used in investing activities................... (15,150) (28,066) (142,382)
--------- --------- ---------
Financing activities:
Repayments of line of credit.............................. -- -- (2,000)
Proceeds from forward sale................................ -- 47,441 --
Principal payments on long-term debt and obligations under
capital leases.......................................... (2,802) (2,083) (1,507)
Proceeds from issuance of common stock.................... 15,000 -- --
Net proceeds from issuance of common stock in initial
public offering......................................... -- -- 58,459
Net proceeds from convertible debt issuance............... -- -- 110,870
Net proceeds from issuance of convertible preferred stock
and warrants............................................ -- 99,900 --
Proceeds from exercise of stock options and employee stock
purchase plan........................................... 1,357 28,784 1,953
Discontinued operations -- financing activities........... -- (43,393) --
--------- --------- ---------
Net cash provided by financing activities............... 13,555 130,649 167,775
--------- --------- ---------
Net increase (decrease) in cash............................. (73,551) 116,167 1,973
Cash and cash equivalents -- beginning of period............ 123,803 7,636 5,663
--------- --------- ---------
Cash and cash equivalents -- end of period.................. $ 50,252 $ 123,803 $ 7,636
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest (includes
conversion payment to debt holders of approximately
$11,200 in 2000)........................................ $ 1,379 $ 14,917 $ 301
========= ========= =========
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired under capital leases................... $ -- $ 736 $ 3,120
Issuance of common stock as consideration for
acquisitions............................................ 42,250 620,336 67,155
Common stock to be issued as consideration for an
acquisition............................................. -- -- 99,546
Warrant exercises......................................... -- 653 92
Preferred dividends....................................... 7,420 5,264 --
Conversion of convertible debt, notes and related party
loans to common stock................................... -- 90,400 5,000

See accompanying notes to consolidated financial statements.
52

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED OTHER
----------------- ----------------- COMMON STOCK PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT TO BE ISSUED CAPITAL COMPENSATION LOSS
------ -------- -------- ------ ------------ ---------- ------------ -----------------

Balance, December 31,
1998.................... 7,806 $ 78 10,538 $ 105 $ -- $ 19,488 $(594) $ --
Conversion to common
stock................... (7,806) (78) 38,939 389 -- (311) -- --
Sale of common stock in
initial public
offering................ -- -- 16,100 161 -- 58,126 -- --
Common stock to be
issued.................. -- -- -- -- 99,546 -- -- --
Notes converted to common
stock................... -- -- 1,250 13 -- 4,987 -- --
Exercise of options....... -- -- 2,215 22 -- 1,358 -- --
Shares issued through
employee stock purchase
plan.................... -- -- 143 2 -- 571 -- --
Shares issued as
consideration for
acquisitions............ -- -- 2,788 28 -- 67,127 -- --
Exercise of warrants...... -- -- 148 1 -- 91 -- --
Unearned compensation..... -- -- -- -- -- 438 (495) --
Amortization of unearned
compensation............ -- -- -- -- -- -- 488 --
Net loss.................. -- -- -- -- -- -- -- --
Other comprehensive
loss.................... -- -- -- -- -- -- -- (219)
------ -------- -------- ------ -------- ---------- ----- --------
Balance, December 31,
1999.................... -- -- 72,121 721 99,546 151,875 (601) (219)
------ -------- -------- ------ -------- ---------- ----- --------
Issuance of warrants...... -- -- -- -- -- 18,007 -- --
Issuance of Series A 6.00%
convertible redeemable
preferred stock......... 100 89,496 -- -- -- -- -- --
Series A 6.00% convertible
redeemable preferred
stock dividends
issued.................. 1 1,450 -- -- -- (1,450) -- --
Series A 6.00% convertible
redeemable preferred
stock dividends accrued
and accretion........... -- 3,814 -- -- -- (3,814) -- --
Reclassification of Series
A 6.00% convertible
redeemable preferred
stock (see Note 15)..... (101) (94,760) -- -- -- -- -- --
Conversion of convertible
debt.................... -- -- 4,665 46 -- 90,354 -- --
Exercise of options....... -- -- 3,806 38 -- 26,003 -- --

TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK EQUITY (DEFICIT)
----------- -------- ----------------

Balance, December 31,
1998.................... $ (19,293) $ (60) $ (276)
Conversion to common
stock................... -- -- --
Sale of common stock in
initial public
offering................ -- -- 58,287
Common stock to be
issued.................. -- -- 99,546
Notes converted to common
stock................... -- -- 5,000
Exercise of options....... -- -- 1,380
Shares issued through
employee stock purchase
plan.................... -- -- 573
Shares issued as
consideration for
acquisitions............ -- -- 67,155
Exercise of warrants...... -- (92) --
Unearned compensation..... -- -- (57)
Amortization of unearned
compensation............ -- -- 488
Net loss.................. (53,480) -- (53,480)
Other comprehensive
loss.................... -- -- (219)
----------- ----- ----------------
Balance, December 31,
1999.................... (72,773) (152) 178,397
----------- ----- ----------------
Issuance of warrants...... -- -- 18,007
Issuance of Series A 6.00%
convertible redeemable
preferred stock......... -- -- 89,496
Series A 6.00% convertible
redeemable preferred
stock dividends
issued.................. -- -- --
Series A 6.00% convertible
redeemable preferred
stock dividends accrued
and accretion........... -- -- --
Reclassification of Series
A 6.00% convertible
redeemable preferred
stock (see Note 15)..... -- -- (94,760)
Conversion of convertible
debt.................... -- -- 90,400
Exercise of options....... -- -- 26,041

Shares issued through
employee stock purchase
plan.................... -- -- 113 1 -- 2,742 -- --
Shares issued as
consideration for
acquisitions............ -- -- 7,186 72 (99,546) 719,810 -- --
Exercise of warrants...... -- -- 157 2 -- 651 -- --
Unearned compensation..... -- -- -- -- -- (29) 29 --
Amortization of unearned
compensation............ -- -- -- -- -- -- 209 --
Net loss.................. -- -- -- -- -- -- -- --
Other comprehensive
loss.................... -- -- -- -- -- -- -- (14,151)
------ -------- -------- ------ -------- ---------- ----- --------
Balance, December 31,
2000.................... -- -- 88,048 880 -- 1,004,149 (363) (14,370)
------ -------- -------- ------ -------- ---------- ----- --------
Series A 6.00% convertible
redeemable preferred
stock dividends accrued
and accretion........... -- -- -- -- -- (7,420) -- --
Exercise and acceleration
of options.............. -- -- 1,519 15 -- 1,475 -- --
Shares issued through
employee stock purchase
plan.................... -- -- 262 3 -- 332 -- --
Shares issued pursuant to
private investment (see
Note 15)................ -- -- 2,763 28 -- 14,972 -- --
Shares issued as
consideration for
acquisitions............ -- -- 20,414 204 -- 42,046 -- --
Reclassification of put
arrangement (see Note
3)...................... -- -- -- -- -- (1,057) -- --
Unearned compensation..... -- -- -- -- -- (163) 163 --
Amortization of unearned
compensation............ -- -- -- -- -- -- 102 --
Net loss.................. -- -- -- -- -- -- -- --
Other comprehensive
income.................. -- -- -- -- -- -- -- 13,411
------ -------- -------- ------ -------- ---------- ----- --------
Balance, December 31,
2001.................... -- $ -- $113,006 $1,130 $ -- $1,054,334 $ (98) $ (959)
====== ======== ======== ====== ======== ========== ===== ========

TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK EQUITY (DEFICIT)
----------- -------- ----------------

Shares issued through
employee stock purchase
plan.................... -- -- 2,743
Shares issued as
consideration for
acquisitions............ -- -- 620,336
Exercise of warrants...... -- (653) --
Unearned compensation..... -- -- --
Amortization of unearned
compensation............ -- -- 209
Net loss.................. (311,316) -- (311,316)
Other comprehensive
loss.................... -- -- (14,151)
----------- ----- ----------------
Balance, December 31,
2000.................... (384,089) (805) 605,402
----------- ----- ----------------
Series A 6.00% convertible
redeemable preferred
stock dividends accrued
and accretion........... -- -- (7,420)
Exercise and acceleration
of options.............. -- -- 1,490
Shares issued through
employee stock purchase
plan.................... -- -- 335
Shares issued pursuant to
private investment (see
Note 15)................ -- -- 15,000
Shares issued as
consideration for
acquisitions............ -- -- 42,250
Reclassification of put
arrangement (see Note
3)...................... -- -- (1,057)
Unearned compensation..... -- -- --
Amortization of unearned
compensation............ -- -- 102
Net loss.................. (760,852) -- (760,852)
Other comprehensive
income.................. -- -- 13,411
----------- ----- ----------------
Balance, December 31,
2001.................... $(1,144,941) $(805) $ (91,339)
=========== ===== ================

See accompanying notes to consolidated financial statements.

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------

Net loss................................................... $(760,852) $(311,316) $(53,480)
Unrealized gain on forward sale............................ 20,030 29,768 --
Foreign currency translation adjustment.................... (699) 169 --
Unrealized loss on investments:
Unrealized loss.......................................... (18,106) (44,088) (219)
Reclassification adjustment for realized loss included in
net loss.............................................. 12,186 -- --
--------- --------- --------
Comprehensive loss......................................... $(747,441) $(325,467) $(53,699)
========= ========= ========

See accompanying notes to consolidated financial statements.
55

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Company

Verticalnet, Inc. was incorporated in Pennsylvania on July 28, 1995. We are
a leading provider of collaborative supply chain solutions that enable
companies, and their supply and demand chain partners to communicate,
collaborate, and conduct commerce more effectively. With a comprehensive set of
collaborative supply chain software applications including spend management,
strategic sourcing, collaborative planning, and order management, we offer a
broad integrated supply chain solution delivered through a multi-party platform.
Additionally, we have the Small/Medium Business ("SMB") group (formerly referred
to as Verticalnet Markets) that operates and manages the 59 industry-specific
on-line marketplaces. Our SMB business is a leading provider of internet
enabled, industry-specific supplier networks designed to allow small-to
medium-sized companies to conduct business with enterprise buyers over the Web.

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.

Basis of Presentation

Our consolidated financial statements include the financial statements of
our wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain prior year amounts
have been reclassified for comparability with the current year's financial
statement presentation.

On January 20, 2000 and July 21, 1999, our board of directors approved a
two-for-one stock split of our common stock effected on March 31, 2000 and
August 20, 1999, respectively. All references in the consolidated financial
statements to shares, share prices and per share amounts have been adjusted
retroactively for these splits.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include the allowance for accounts receivable; inventory write-downs;
carrying values for intangible assets and non-publicly held investments; and
restructuring charges for abandoned operating leases.

Cash and Cash Equivalents

Cash and cash equivalents include cash, money market investments and other
highly liquid investments with maturities of three months or less.

Restricted Cash

Restricted cash represents certificates of deposit held pursuant to
building lease agreements and other financing arrangements. At December 31,
2001, we had approximately $2.0 million and $1.7 million of restricted cash
classified in current and non-current other assets, respectively, on the
consolidated balance

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sheet. At December 31, 2000, we had approximately $7.9 million and $3.7 million
of restricted cash classified in current and non-current other assets,
respectively, on the consolidated balance sheet.

Investments

We account for debt securities and marketable equity securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. These
available-for-sale investments are classified as short-term and long-term
investments on the consolidated balance sheet and are reported at fair value,
with unrealized gains and losses recorded in other comprehensive income (loss).
Realized gains or losses and other than temporary declines in fair value of
available-for-sale securities are reported in other income (expense), as
incurred.

We hold equity instruments of privately-held companies for business and
strategic purposes. These investments are included in other investments on the
consolidated balance sheet and are accounted for under the cost method since our
ownership percentage is less than 20% and we do not have the ability to exercise
significant influence over the investees. For these non-publicly traded
investments, our policy is to regularly review the market conditions and the
assumptions underlying the operating performance and cash flow forecasts in
assessing the recoverability of the carrying values.

Investments in privately owned companies whose results are not
consolidated, but over whom we exercise significant influence are accounted for
under the equity method of accounting and included in other investments on the
consolidated balance sheet. Determining whether we exercise significant
influence with respect to a particular investment depends on an evaluation of
several factors including, among others, representation on the investee's board
of directors, as well as our overall ownership level of the investee, including
voting rights associated with our holdings in common, preferred and other
convertible instruments in the investee. Under the equity method of accounting,
our share of the earnings or losses of the investee is reflected in other income
(expense) on our consolidated statement of operations.

Inventory

Inventory consists of merchandise purchased for resale in our asset
remarketing business, which is part of the SMB group. Inventory is recorded at
the lower of cost or market with cost determined on a specific identification
basis. During the year ended December 31, 2001, we recorded an inventory
write-down of approximately $2.6 million, which is included in cost of
e-enablement, e-commerce, advertising and other services revenue. The inventory
balance included in prepaid expenses and other assets, is approximately $2.6
million and $1.3 million at December 31, 2001 and 2000, respectively.

Property and Equipment

Property and equipment are originally stated at cost. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
estimated useful life of the asset or the lease term. Property and equipment are
depreciated on a straight-line basis over the estimated useful lives of the
assets as follows:

Computer equipment and software............................. 1.5-3 years
Office equipment and furniture.............................. 5 years
Trade show equipment........................................ 7 years
Leasehold improvements...................................... 3-5 years

Capitalized Software

Under the provisions of Statement of Position ("SOP") 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, we
capitalize costs associated with internally developed

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and/or purchased software systems for new products and enhancements to existing
products that have reached the application development stage and meet
recoverability tests. Capitalized costs include external direct costs of
materials and services utilized in developing or obtaining internal-use
software, payroll and payroll-related expenses for employees who are directly
associated with and devote time to the internal-use software project and
interest costs incurred, if material, while developing internal-use software.
Capitalization of such costs begins when the preliminary project stage is
complete and ceases no later than the point at which the project is
substantially complete and ready for its intended purpose. These capitalized
costs are amortized on a straight-line basis over the economic useful life,
beginning when the asset is ready for its intended use.

Under the provisions of SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, certain development costs of
our software products are capitalized subsequent to the establishment of
technological feasibility and up to the time the product becomes available for
general release. Amortization is provided on a product-by-product basis on the
straight-line method over the remaining estimated economic life of the product.

Software costs capitalized under SOP 98-1 and SFAS No. 86 approximated $0.4
million and $6.1 million as of December 31, 2001 and 2000, respectively, and are
included in property and equipment on the consolidated balance sheet.
Amortization expense for the years ended December 31, 2001 and 2000 was
approximately $2.7 million and $2.0 million. The carrying value of the software
is regularly reviewed and an impairment is recognized if the value of the
estimated undiscounted cash flow benefits related to the asset is less than the
remaining unamortized cost. Approximately $4.0 million and $1.0 million of
capitalized software costs were impaired and included in the restructuring and
asset impairment charges during the years ended December 31, 2001 and 2000,
respectively.

Intangible and Other Long-Lived Assets

Goodwill is amortized using the straight-line method from the date of
acquisition over the period of the expected benefits, which is three years.
Other intangible assets resulting from acquisitions, including covenants
not-to-compete, acquired technology and contractual arrangements, are also
amortized using the straight-line method from the date of acquisition over the
period of the expected benefits, ranging from 3 to 36 months.

We regularly perform reviews to determine whether events or changes in
circumstances indicate that the carrying value of the goodwill and other
intangible assets may not be recoverable. We assess long-lived assets for
impairment under SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. 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. While we currently believe that the recorded
amount of goodwill and other intangible assets at December 31, 2001 is not
impaired, a significant write-down or write off may be required in the future.

Self Insurance

We are self-insured for certain losses related to employee medical
benefits. We have purchased stop-loss coverage in order to limit our exposure.
Self insurance losses are accrued based on our estimates of the aggregate
liability for uninsured claims incurred using certain actuarial assumptions
followed in the insurance industry. At December 31, 2001 and 2000, the accrued
liability for self-insured losses is included in accrued expenses and
approximates $0.8 million and $1.3 million, respectively.

Financial Instruments

In accordance with the requirements of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, we have determined the estimated fair value of
our financial instruments using available market

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

information and valuation methodologies. Our financial instruments consist of
cash and cash equivalents, available-for-sale investments, accounts receivable,
accounts payable, capital leases and convertible notes. Considerable judgment is
required to develop the estimates of fair value; thus, the estimates are not
necessarily indicative of the amounts that could be realized in a current market
exchange. However, we believe the carrying values of these assets and
liabilities, with the exception of the convertible notes, is a reasonable
estimate of their fair market values at December 31, 2001 and 2000 due to the
short maturities of such items. Based on their quoted market value as of
December 31, 2001 and 2000, the convertible notes are estimated to have an
aggregate fair market value of approximately $5.4 million and $11.5 million,
respectively.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash and cash equivalents in bank deposits
accounts, short-term investments and trade receivables. Cash and cash
equivalents are held with high quality financial institutions. Short-term
investments are primarily held in high quality corporate debt instruments and
government obligations. We periodically perform credit evaluations of our
customers and maintain reserves for potential losses. We do not anticipate
losses from these receivables in excess of the provided allowances.

Total revenues from Microsoft were approximately $60.0 million, or 48%, of
total revenues for the year ended December 31, 2001 and $30.5 million, or 27%,
of total revenues for the year ended December 31, 2000. Approximately 38% of our
deferred revenue balance as of December 31, 2001 relates to Microsoft. Total
revenues from Converge, Inc. ("Converge") were approximately $30.9 million, or
25%, of total revenues for the year ended December 31, 2001. Approximately 52%
of our deferred revenue balance as of December 31, 2001 relates to Converge. No
single customer accounted for greater than 10% of total revenues during the year
ended December 31, 1999.

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 and percentage of sale
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. Previously we also
entered 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.

Revenues from software licensing and related services are accounted for
under SOP 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions, 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, as amended, requires revenue earned on software
arrangements involving multiple

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 of the
software 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 December 31, 2001 and December 31, 2000, approximately $0.6 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 years ended December 31, 2001, 2000 and 1999, we recognized
approximately $6.4 million, $9.4 million and $3.8 million of advertising
revenues, respectively, and $8.4 million, $7.7 million and $3.0 million of
advertising expenses, respectively, from barter transactions. We have recorded
approximately $0.2 million and $2.3 million in prepaid expenses related to
barter transactions as of December 31, 2001 and 2000, respectively.

Research and Development

Research and development costs consist primarily of salaries and benefits,
consulting and other related expenses, which are expensed as incurred.

Advertising Costs

We expense advertising costs as incurred and report such costs as a
component of sales and marketing expense. Advertising expenses, exclusive of
barter advertising discussed above, were approximately $19.5 million, $32.4
million and $4.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

Stock Options

Stock-based employee compensation is recognized using the intrinsic value
method in accordance with Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees. For disclosure purposes, pro forma net
loss and loss per share data are provided in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, as if the fair value method had been
applied.

Foreign Currency Translation

We translate the assets and liabilities of international subsidiaries into
U.S. dollars at the current rates of exchange in effect as of each balance sheet
date. Revenues and expenses are translated using average rates in effect during
the period. Gains and losses from translation adjustments are included in
accumulated other comprehensive loss on the consolidated balance sheet. Foreign
currency transaction gains or losses, are

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized in current operations and have not been significant to our operating
results in any period. The effect of foreign currency rate changes on cash and
cash equivalents has not been significant in any period.

Comprehensive Income (Loss)

We report comprehensive income or loss in accordance with the provisions of
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting comprehensive income (loss) and its components in financial
statements. Comprehensive income or loss, as defined, includes all changes in
equity (net assets) during a period from non-owner sources.

Income Taxes

We record income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and the tax
effect of net operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment date. A valuation
allowance is recorded against deferred tax assets if it is more likely than not
that such assets will not be realized.

Computation of Historical Net 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 stock (using
the if-converted method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive. Common stock issued upon the
conversion of the convertible notes given as consideration in connection with
the purchase of NECX.com LLC was included in the calculation from the date of
acquisition in December 1999 because the related securities were accounted for
as equity.

New Pronouncements

Effective January 1, 2001, we adopted 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. 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

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transaction of $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 included in other comprehensive income (loss) was $49.8 million
and $29.8 million for the years ended December 31, 2001 and 2000, respectively
(see Note 9).

During the year ended December 31, 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 as of December 31, 2001, had been classified as fair
value hedges. The transition adjustment from adopting SFAS No. 133 for these
agreements was immaterial. During the year ended December 31, 2001, we recorded
approximately $0.2 million in other income (expense) related to these foreign
currency forward contracts.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

(2) LIQUIDITY

During 2001, our available cash, cash equivalent and short-term investments
resources declined by approximately $95.0 million, principally as a result of
continued operating losses. Accounts receivable also declined by approximately
$30.0 million in 2001 to a balance of less than $2.0 million as of December 31,
2001. Cash flows from two significant customers, Microsoft and Converge, were
instrumental in financing our business during 2001. As of December 31, 2001, the
Microsoft contractual arrangements have been terminated and anticipated cash
flows under the Converge contractual arrangements have been significantly
curtailed (see Note 10). As a result, we will become increasingly dependent on
generating revenues and operating cash flows from new customers in 2002.

(3) ACQUISITIONS

Atlas Commerce

On December 28, 2001, we acquired all of the outstanding capital stock of
Atlas Commerce, Inc. ("Atlas Commerce"), a privately held software company that
provides private exchange software and strategic sourcing applications. As a
result of the acquisition, we expect to significantly accelerate our enterprise
software business by offering an integrated collaborative sourcing solution that
represents a combination of both companies' technologies. Atlas Commerce's
results of operations will be consolidated starting January 1, 2002. The
aggregate purchase price was approximately $26.8 million, including transaction
costs. The consideration included $3.5 million in cash, 14,305,708 shares of our
common stock valued at approximately $19.5 million and issuance of employee
options to purchase 1,630,075 of our common stock valued as of the date of
acquisition at $1.4 million based on an independent valuation. Included in the
stock consideration are 148,078 shares of our common stock to be issued to a
former Atlas Commerce executive in January 2003. A portion of the value of the
common stock given as consideration was reduced by an illiquidity discount
ranging from 5% to 10% based on restrictions detailed in a registration and lock
up agreement executed in connection with the transaction.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. We obtained an
independent valuation of certain intangible assets.

(IN THOUSANDS)

Current assets.............................................. $ 4,285
Property and equipment, net................................. 2,048
Other non-current assets.................................... 566
Intangible assets........................................... 3,235
Goodwill.................................................... 21,562
-------
Total assets acquired.................................. 31,696
Current liabilities......................................... (4,919)
Long-term debt.............................................. (12)
-------
Total liabilities assumed.............................. (4,931)
-------
Net assets acquired.................................... $26,765
=======

Of the $3.2 million of acquired intangible assets, $0.4 million was
assigned to in-process research and development and charged to expense as a
non-recurring charge upon consummation of the acquisition since the in-process
research and development has not yet reached technological feasibility and has
no alternative future use (see Note 4). The remaining $2.8 million of acquired
intangible assets have a weighted-average useful life of 35 months. These
intangibles include developed technology of approximately $1.9 million with a
useful life of 36 months and customer contracts of approximately $0.9 million
with a weighted average useful life of 32 months. The $21.6 million of goodwill
was assigned to the enterprise software segment.

Approximately $1.6 million of the current liabilities assumed in the Atlas
Commerce transaction relate to restructuring initiatives taken by management as
part of the integration plan. The accrual includes approximately $1.1 million of
severance related costs for six employees and approximately $0.5 million of
lease termination costs for three facilities. The lease termination costs were
estimated based on the present value of future lease payments.

Other 2001 Acquisitions

During the year ended December 31, 2001, we completed two additional
acquisitions, including Net Commerce and Plasticsnet. The aggregate purchase
price of these acquisitions was approximately $2.0 million in cash. These
acquisitions were accounted for as purchases and the excess of the purchase
price over the fair value of net assets acquired of approximately $2.2 million
was allocated to goodwill and other intangibles. The results of operations from
these acquisitions were not material to our financial position or results of
operations.

Tradeum

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reached technological feasibility and had no alternative future use. The
existing technology, assembled workforce and goodwill were being amortized on a
straight-line basis over 36 months. As of December 31, 2001, all goodwill and
intangible assets related to the Tradeum acquisition have been impaired and
written off (see Note 6).

Verticalnet Europe

In June 2000, we formed Verticalnet Europe B.V. ("Verticalnet Europe"), a
joint venture with British Telecommunications, plc ("BT") and Internet Capital
Group, Inc. ("ICG"). The joint venture was funded with 109.5 million Euros
(approximately $114.7 million as of the closing date) from the three partners.
We contributed to Verticalnet Europe approximately $6.8 million in cash and
intellectual property independently valued at approximately $120.0 million for
the operation of e-marketplaces within Europe in exchange for a 56% ownership
interest in Verticalnet Europe. Additionally, Verticalnet Europe and BT created
Verticalnet UK Ltd. as part of the joint venture agreement.

During the three months ended March 31, 2001, our percentage ownership of
Verticalnet Europe increased to approximately 90%. Verticalnet Europe redeemed a
portion of its shares held by ICG, and ICG sold the remaining portion directly
to us for approximately $2.3 million in cash. We also purchased a portion of
BT's ownership of Verticalnet Europe for approximately $6.4 million in cash and
4,993,173 shares of our common stock. The shares of common stock issued to BT
were registered under our acquisition shelf registration statement. We also
entered into a put/call agreement with BT whereby we can purchase their
remaining 10% interest in Verticalnet Europe at any time after closing and BT
may sell its investment to us at any time after March 13, 2002 (see Notes 11 and
22). The increase in ownership was accounted for as a purchase and the estimated
excess of the purchase price over the fair value of the tangible net assets
acquired of approximately $20.0 million was allocated to goodwill and was being
amortized over 36 months. As of December 31, 2001 all goodwill related to the
Verticalnet Europe acquisition has been impaired and written off (see Note 6).

Other 2000 Acquisitions

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Isadra

In August 1999, we acquired all of the outstanding capital stock of Isadra,
Inc. ("Isadra") for $2.4 million in cash, 2,000,000 shares of common stock
valued at approximately $37.8 million, based on an independent valuation, and
81,526 options to purchase our common stock, valued at approximately $1.5
million at the date of acquisition using the Black-Scholes model. The common
stock given as consideration was reduced by an illiquidity discount based on
restrictions detailed in the lock up agreements signed by the individuals
receiving the stock. The acquisition was accounted for as a purchase and the
estimated excess of the purchase price over the fair value of the tangible net
assets acquired of approximately $43.9 million was allocated to in-process
research and development, existing technology, assembled work force and goodwill
in the amounts of approximately $13.6 million, $2.1 million, $0.5 million and
$27.7 million, respectively. The $13.6 million was charged to expense as a
non-recurring charge upon consummation of the acquisition since the in-process
research and development had not yet reached technological feasibility and had
no alternative future use (see Note 4). The existing technology and assembled
work force were amortized on a straight-line basis over 24 months, while
goodwill is being amortized on a straight-line basis over 36 months. The
remaining goodwill balance of approximately $6.0 million at December 31, 2001
will be evaluated as part of the Enterprise software business for the
implementation of SFAS No. 142 in 2002.

Other 1999 Acquisitions

For all of the acquisitions described above, the results of the acquired
companies have been included in our financial statements from the date of
acquisition.

Other Information

Acquisitions related to the Verticalnet Exchanges segment are described in
Note 5.

The following unaudited pro forma financial information presents the
combined results of operations of Verticalnet and Tradeum (the material
acquisition related to our continuing operations) as if the acquisition occurred
on January 1, 2000, after giving effect to certain adjustments, including
amortization expense. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
Verticalnet and Tradeum constituted a single entity during such periods. The
unaudited pro forma financial information does not include the operations of the
Verticalnet Exchanges segment, which is accounted for as a discontinued
operation (in thousands, except per share data).

YEAR ENDED
DECEMBER 31,
2000
------------

Revenues.................................................... $112,508
Loss attributable to common shareholders.................... (361,987)
Loss per common share....................................... (4.32)

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) IN-PROCESS RESEARCH AND DEVELOPMENT

In various software company acquisitions, we have allocated a portion of
the purchase price to in-process research and development ("IPR&D"). These
allocations to IPR&D, which were determined by independent valuations,
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of these
acquisitions, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the date
of the acquisition.

Atlas Commerce

In connection with the acquisition of Atlas Commerce in December 2001
(refer to Note 3), we allocated $0.4 million of the purchase price to IPR&D. At
the acquisition date, Atlas Commerce was developing new code and technology for
version 3.3 of their Metaprise Platform and Application product. The project
under development was specifically reviewed in terms of overall objectives,
progress toward the objectives and the uniqueness of the developments under
these objectives. The new code and technology under development were
approximately 20% complete, based on project man-months and costs.

The discounted cash flow analysis used to value the IPR&D was based on
management's forecast of future revenues, gross profit, selling costs,
maintenance development costs and administrative expenses. Forecasted revenue
and costs were then allocated to IPR&D based on management's estimate that
approximately 80% of the technology in a specific version of the software was
taken from the previous release and the remaining 20% was newly developed. A
risk-adjusted discount rate of 60% was used to discount the forecasted cash
flows allocated to IPR&D.

Tradeum

In connection with the acquisition of Tradeum in March 2000 (refer to Note
3), we allocated $10.0 million of the purchase price to IPR&D. At the
acquisition date, Tradeum was conducting design, development, engineering
testing activities associated with the development of next-generation
technologies that were expected to address emerging market demands for
business-to-business e-commerce. The technologies under development were between
20% and 25% complete, based on project man-months and costs. Tradeum had spent
approximately $1.1 million on the IPR&D projects, and expected to spend
approximately $3.9 million to complete the research and development.

In making the purchase price allocation, we considered present value
calculations of income, an analysis of project accomplishments and completion
costs, an assessment of overall contributions, as well as project risks. The
value assigned to IPR&D was determined by estimating the costs to develop the
acquired technology into commercially viable products, estimating the resulting
net cash flows from the projects, and discounting the net cash flows to their
present value. The revenue projection used to value the IPR&D was based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by us
and our competitors. The resulting net cash flows from such projects were based
on management's estimates of cost of sales, operating expenses and income taxes
from such projects. A risk-adjusted discount rate of 25% was utilized to
discount projected cash flows.

Isadra

In connection with the acquisition of Isadra in August 1999 (refer to Note
3), we allocated $13.6 million of the purchase price to IPR&D. At the
acquisition date, Isadra was conducting development, engineering and testing
activities associated with the completion of next generation technologies. The
projects under development, at the valuation date, were expected to address
emerging market demands for business-to-business e-commerce. At the acquisition
date, the technologies under development were between 70% and

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

80% complete, based on project man-months and costs. Isadra had spent
approximately $3.0 million on the IPR&D projects and expected to spend
approximately $1.0 million to complete the IPR&D projects.

In allocating the purchase price, we considered present value calculations
of income, an analysis of project accomplishments and completion costs, an
assessment of overall contributions, as well as project risks. The values
assigned to IPR&D were determined by estimating the costs to develop the
purchased technology into commercially viable products, estimating the resulting
net cash flows from each project, excluding the cash flows related to the
portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts were based upon future discounted cash flows, taking into
account the state of development of each in-process project, the cost to
complete that project, the expected income stream, the life cycle of the product
ultimately developed and the associated risks. A risk-adjusted discount rate of
50% was utilized to discount projected cash flows.

(5) DISCONTINUED OPERATIONS

On January 31, 2001, we completed the sale of our Verticalnet Exchanges
segment to 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. In the
second quarter of 2001 following a post-closing audit, the final net worth and
working capital adjustment calculation was performed. The calculation, which was
based on a comparison of Verticalnet Exchanges' net worth and working capital as
of October 31, 2000 and as of the closing date, resulted in us making an
aggregate payment of $12.8 million to Converge.

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 (see Note 9). 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 year ended December 31, 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:

YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------- -------- -------
(IN THOUSANDS)

Exchange transaction sales........................... $ -- $633,762 $16,501
Cost of exchange transaction sales................... -- 525,182 14,171
------- -------- -------
Net exchange revenues.............................. $ -- $108,580 $ 2,330
======= ======== =======
Loss from discontinued operations.................... $ -- $(27,018) $ (891)
======= ======== =======
Loss on disposal of discontinued operations.......... $(3,903) $(81,968) $ --
======= ======== =======

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

DECEMBER 31,
2000
---------------
(IN THOUSANDS)

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

The following are businesses acquired in 1999 and 2000, which have been
disposed of as part of the sale of our Verticalnet Exchanges segment:

NECX

In December 1999, we acquired substantially all of the assets and
liabilities of NECX for approximately $14.1 million in cash and $70.0 million of
notes convertible into common stock. The notes were valued at the estimated fair
value of the shares into which they were convertible, based on the average of
the stock price for a few days before and after the date the transaction was
announced. On the date of the definitive agreement, the notes were convertible
into 2,008,738 shares of our common stock valued at approximately $99.5 million.
Since the notes were required to be paid in common stock and it was our
intention to convert the notes once a registration statement was declared
effective, the notes were accounted for as common stock to be issued. In April
2000, a registration statement registering the underlying shares of the
convertible notes was declared effective and the actual number of shares issued
upon the conversion of the notes was 1,768,034. Additionally, we assumed certain
liabilities including $10.0 million in debt and a $22.0 million line of credit,
which were paid off upon the transaction closing.

NECX was a privately held leader in buying and selling semiconductors,
electronic components, computer products and networking equipment. The
acquisition was accounted for as a purchase and the excess of the purchase price
over the fair value of the tangible net assets acquired of approximately $115.5
million was allocated to strategic relationships, including customer and vendor
lists, assembled workforce and goodwill in the amounts of approximately $13.0
million, $2.5 million and $100.0 million, respectively. The assembled workforce
was being amortized on a straight-line basis over 48 months, while strategic
relationships and goodwill were being amortized on a straight-line basis over 60
months.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RW Electronics

On March 31, 2000, NECX acquired substantially all of the assets and
liabilities of RWE for approximately $14.5 million in cash and 720,652 shares of
our common stock valued at approximately $73.0 million. Based on the purchase
agreement terms, an additional 311,741 shares of common stock were issued to the
RWE shareholders due to a decline in the market value of our common stock upon
the registration of the shares with the Securities and Exchange Commission in
May 2000. Additionally, NECX assumed certain liabilities, including a $22.9
million line of credit, which was paid off upon the transaction closing. RWE was
a privately held company engaged in buying and selling semiconductors,
electronic components, computer products and networking equipment. The
acquisition was accounted for as a purchase and the excess of the purchase price
over the fair value of the tangible net assets acquired of approximately $76.3
million was allocated to strategic relationships, including customer and vendor
lists, assembled workforce and goodwill in the amounts of approximately $15.0
million, $0.5 million and $60.8 million, respectively. The assembled workforce
was being amortized on a straight-line basis over 48 months, while strategic
relationships and goodwill were being amortized on a straight-line basis over 60
months.

American IC Exchange

On July 13, 2000, NECX acquired substantially all of the assets and assumed
certain of the liabilities of AICE for 1,097,457 shares of our common stock
valued at approximately $54.9 million. We agreed to pay additional consideration
(payable in shares of our common stock) upon the achievement of negotiated
financial and operating targets. As of December 31, 2000, we had issued an
additional 239,552 shares of our common stock valued at approximately $8.1
million for earnout provisions that had been earned. The acquisition was
accounted for as a purchase and the excess of the purchase price over the fair
value of the tangible net assets acquired of approximately $51.3 million was
allocated to developed technology, trade name, strategic relationships,
assembled workforce and goodwill in the amounts of approximately $8.0 million,
$5.4 million, $4.7 million, $0.6 million and $32.6 million, respectively. In
January 2001, in connection with the sale of NECX to Converge, we settled AICE's
remaining earnout provisions by issuing an additional 1,101,549 shares of our
common stock valued at approximately $10.0 million.

(6) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

During the year ended December 31, 2001, we announced and implemented
several strategic and organizational initiatives designed to realign business
operations, eliminate acquisition related redundancies and reduce costs. As a
result of these restructuring initiatives we recorded an aggregate restructuring
and asset impairment charge of approximately $345.5 million during the year
ended December 31, 2001.

The aggregate remaining restructuring accrual at December 31, 2001 of
approximately $7.1 million, included in accrued expenses on the consolidated
balance sheet, 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)

First Quarter 2001 Restructuring and Asset Impairment

During the first quarter of 2001, we recorded a restructuring and asset
impairment charge of approximately $7.5 million. The following table provides a
summary by category and a rollforward of the changes in the restructuring
accrual for the year ended December 31, 2001:

RESTRUCTURING
AND ASSET ACCRUAL AT
IMPAIRMENT CASH NON-CASH DECEMBER 31,
CHARGES PAYMENTS CHARGES OTHER 2001
------------- -------- -------- ----- ------------
(IN THOUSANDS)

Lease termination costs............... $1,593 $(1,450) $ -- $153 $296
Employee severance and related
benefits............................ 2,847 (2,975) -- 138 10
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 $(4,463) $(3,093) $397 $306
====== ======= ======= ==== ====

The amount accrued at December 31, 2001 for lease termination costs relates
to one lease, out of the original twenty leases included in the restructuring
charge, that has not yet been terminated. The amount represents the net expense
expected to be incurred to sublet the facility.

The amount accrued at December 31, 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.

Asset disposals included software, leasehold improvements, furniture,
computer equipment and prepaid assets that will no longer be utilized in the
ongoing operations due to the restructuring.

During the second, third, and fourth quarters of 2001, we recorded
additional expenses 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 additional expenses recorded in the second, third, and fourth quarters of
2001 are reflected in restructuring and asset impairment charges in the
consolidated statements of operations.

Second Quarter 2001 Restructuring and Asset Impairment

During the second quarter of 2001 we recorded a restructuring and asset
impairment charge of approximately $218.4 million. The following table provides
a summary by category and a rollforward of the changes in the restructuring
accrual for the year ended December 31, 2001:

RESTRUCTURING
AND ASSET ACCRUAL AT
IMPAIRMENT CASH NON-CASH DECEMBER 31,
CHARGES PAYMENTS CHARGES OTHER 2001
------------- -------- --------- ------- ------------
(IN THOUSANDS)}

Lease termination costs............... $ 3,244 $(1,072) $ -- $(2,092) $ 80
Employee severance and related
benefits............................ 4,170 (3,961) (63) 62 208
Other exit costs...................... 60 (115) - 55 --
Asset disposals, net of cash
received............................ 8,847 -- (8,743) (104) --
Goodwill and other intangible
assets.............................. 202,073 -- (201,879) (194) --
-------- ------- --------- ------- ----
$218,394 $(5,148) $(210,685) $(2,273) $288
======== ======= ========= ======= ====

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amount accrued at December 31, 2001 for lease termination costs relates
to one lease, out of the original four leases included in the restructuring
charge, that has not yet been terminated. The amount represents the net expense
expected to be incurred to sublet the facility.

Asset disposals included software, leasehold improvements, furniture,
computer equipment and prepaid assets that will no longer be utilized in the
ongoing operations due to the restructuring.

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, which
resulted in 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. The estimate of fair value was based
upon the valuation of comparable publicly held businesses.

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 SMB group, including approximately
$20.6 million related to our acquisition of Verticalnet Europe. We estimated the
fair value of the continuing SMB business based upon the amounts we could
reasonably expect to realize in the sale of those assets.

During the third and fourth quarters of 2001, we recorded adjustments of
approximately $(2.1) million, $0.1 million, $(0.1) million and $(0.2) million
related to lease termination costs, employee termination benefits and other exit
costs, asset disposals and goodwill write downs, respectively, due to changes in
estimates from the original charges. The adjustments recorded in the third and
fourth quarters of 2001 are reflected in restructuring and asset impairment
charges in the consolidated statements of operations.

Third Quarter 2001 Restructuring and Asset Impairment

During the third quarter we recorded a restructuring and asset impairment
charge of $15.3 million. The following table provides a summary by category and
a rollforward of the changes in the restructuring accrual for the year ended
December 31, 2001:

RESTRUCTURING
AND ASSET ACCRUAL AT
IMPAIRMENT CASH NON-CASH DECEMBER 31,
CHARGES PAYMENTS CHARGES OTHER 2001
-------------- -------- -------- ----- ------------
(IN THOUSANDS)

Lease termination costs.................. $ 1,730 $(1,654) $ -- $ 1 $ 77
Employee severance and related
benefits............................... 4,725 (4,744) -- 54 35
Other exit costs......................... 177 (95) -- (82) --
Asset disposals, net of cash received.... 8,656 -- (9,092) 436 --
------- ------- ------- ---- ----
$15,288 $(6,493) $(9,092) $409 $112
======= ======= ======= ==== ====

The amount accrued at December 31, 2001 for lease termination costs relates
to three leases, out of the original six 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.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

During the fourth quarter of 2001, we recorded adjustments of approximately
$0.1 million, $(0.1) million and $0.4 million related to employee termination
benefits, other exit costs, and asset disposals, respectively, due to changes in
estimates from the original charges. The adjustments recorded in the fourth
quarter of 2001 are reflected in restructuring and asset impairment charges in
the consolidated statements of operations.

Fourth Quarter 2001 Restructuring and Asset Impairment

During the fourth quarter of 2001 we recorded a restructuring and
impairment charge of approximately $105.9 million. The following table provides
a summary of the charges and cash payments made by category as well as the
amounts accrued as of December 31, 2001:

RESTRUCTURING
AND ASSET ACCRUAL AT
IMPAIRMENT CASH NON-CASH DECEMBER 31,
CHARGES PAYMENTS CHARGES 2001
------------- -------- -------- ------------
(IN THOUSANDS)

Lease termination costs................. $ 4,405 $ (95) $ -- $4,310
Employee severance and related
benefits.............................. 2,823 (433) (349) 2,041
Other exit costs........................ 25 -- -- 25
Asset disposals, net of cash received... 17,628 -- (17,628) --
Goodwill and other intangible assets.... 80,981 -- (80,981) --
-------- ----- -------- ------
$105,862 $(528) $(98,958) $6,376
======== ===== ======== ======

Lease termination costs include the estimated cost to close two office
facilities and to terminate a capital lease contract. The charge represents the
amount required to fulfill our obligation under signed lease contracts, the net
expense expected to be incurred to sublet the facilities, or the estimated
amount to be paid to terminate the lease contracts before the end of their
terms.

The reduction in workforce included approximately 120 employees from the
following areas: cost of revenues, research and development, sales and
marketing, and general and administrative.

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

We also impaired $81.0 million of identifiable intangible assets and
goodwill in accordance with SFAS No. 121. We wrote-off our remaining goodwill
balance of approximately $76.1 million related to our Tradeum acquisition. The
decision to impair the remaining Tradeum goodwill was primarily based on our
acquisition of Atlas Commerce and our decision to migrate to the Atlas Commerce
platform which will replace the various Tradeum based components of our
Enterprise software products. The remaining goodwill impairment of $4.9 million
was related to an asset remarketing business which is part of our SMB unit. We
estimated the fair value of this business based upon the amounts we could
reasonably expect to realize in the sale of those assets.

2000 Asset Impairments

During the year ended December 31, 2000, we recorded a goodwill impairment
charge of approximately $11.5 million based on an analysis of projected
undiscounted cash flows. Additionally, included in general and

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

administrative expenses for the year ended December 31, 2000 is approximately
$5.6 million in write-offs for obsolete software, prepaid assets and deferred
costs for terminated acquisitions.

(7) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

DECEMBER 31,
-------------------
2001 2000
-------- -------
(IN THOUSANDS)

Software................................................ $ 8,198 $16,166
Computer equipment...................................... 11,703 16,227
Office equipment and furniture.......................... 2,197 6,404
Trade show equipment.................................... 360 349
Leasehold improvements.................................. 356 2,614
-------- -------
22,814 41,760
Less: accumulated depreciation and amortization......... (11,393) (9,362)
-------- -------
Property and equipment, net............................. $ 11,421 $32,398
======== =======

Amortization applicable to property and equipment under capital leases is
included in depreciation expense.

During the year ended December 31, 2001, we recorded a charge of
approximately $23.3 million related to the impairments of leasehold improvements
for abandoned facilities, as well as impairments to furniture, office and
computer equipment and software no longer being utilized in the ongoing
operations of the business (see Note 6).

(8) INTANGIBLE ASSETS

Intangible assets consist of the following:

DECEMBER 31,
---------------------
2001 2000
-------- ---------
(IN THOUSANDS)

Goodwill.............................................. $ 49,297 $ 525,206
Covenant not-to-compete............................... -- 850
Existing technology................................... 4,550 9,600
Customer contracts.................................... 890 --
Assembled workforce................................... 500 1,700
-------- ---------
55,237 537,356
Less: accumulated amortization........................ (24,462) (149,015)
-------- ---------
Intangible assets, net................................ $ 30,775 $ 388,341
======== =========

Amortization expense was $119.1 million, $146.8 million and $6.8 million
for the years ended December 31, 2001, 2000 and 1999, respectively. Goodwill and
other intangible asset impairments were approximately $284.4 million and $11.5
million for the years ended December 31, 2001 and 2000, respectively.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) INVESTMENTS

Investments categorized as available-for-sale securities were as follows:

GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)

DECEMBER 31, 2001
Marketable equity securities................. $52,862 $2 $(50,229) $ 2,635
======= == ======== =======
DECEMBER 31, 2000
Corporate debt obligations................... $ 9,925 $1 $ (8) $ 9,918
U.S. Government & Government Agency
obligations................................ 11,000 5 (4) 11,001
Marketable equity securities................. 67,592 -- (44,301) 23,291
------- -- -------- -------
$88,517 $6 $(44,313) $44,210
======= == ======== =======

Our marketable equity securities, which consist of investments in publicly
traded companies for which we do not have the ability to exercise significant
influence, are classified as available-for-sale and are stated at fair market
value based on quoted market prices. Our investment in Ariba, Inc. ("Ariba")
common stock of approximately $2.6 million and $22.9 million at December 31,
2001 and 2000, respectively, is classified as long-term due to a forward sale of
the majority of our shares (see Note 11).

During the year ended December 31, 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 execution date.

Proceeds from sales of available-for-sale investments were approximately
$21.5 million and $141.6 million, respectively, for the years ended December 31,
2001 and 2000. Gross realized losses were approximately $1.6 million for the
year ended December 31, 2001. Gross realized losses and gains were approximately
$5.6 million and $85.5 million, respectively, for the year ended December 31,
2000. Realized gains and losses are computed on a specific identification basis.

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 withheld due to a dispute under the
Agreement and Plan of Reorganization. In March 2001, we wrote off the remaining
shares held in escrow which resulted in a $2.2 million loss on investment.

Cost Method Investments

At December 31, 2001 and 2000, cost method investments were approximately
$10.6 million and $12.2 million, respectively. During the year ended December
31, 2001, we recorded an aggregate impairment charge of $207.2 million related
to our Converge investment which was initially valued at $215.0 million (see

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Note 5). The impairment charge was based on independent valuations of our
Converge investment which we obtained subsequent to Converge's announcement that
it would restructure its business. During the years ended December 31, 2001 and
2000, we recorded additional impairment charges of approximately $12.0 million
and approximately $6.4 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.

Equity Method Investments

At December 31, 2001 and December 31, 2000, our equity method investments
were approximately $0.2 million and $5.4 million, respectively. During the year
ended December 31, 2001 all of our equity method investments have either been
dissolved by mutual agreement of the investors or we have sold our ownership to
the other investors. At December 31, 2001, our remaining investment balance of
$0.2 million relates to the proceeds expected from the current liquidation of
Verticalnet Kabushiki Kaisha (Verticalnet Japan). Our loss from equity method
investments, which is included in other income (expense), is approximately $2.3
million and $2.8 million for the years ended December 31, 2001 and 2000,
respectively. During the year ended December 31, 2001, we recorded impairment
charges (net of cash returned from the sale or liquidation of investments), of
approximately $1.6 million which is included in other income (expense).

Long-Term Investments and Other Long-Term Liabilities

In July 2000, we entered into forward sale contracts relating to our
investment in Ariba. Under these contracts, we pledged our shares of Ariba
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. The fair value of
our Ariba shares at December 31, 2001 was approximately $2.6 million and is
included in long-term investments.

The fair value of the obligation in connection with the forward sale is
$2.6 million as of December 31, 2001 and is reflected in other long-term
liabilities. The initial cost of the transaction, which was approximately $5.0
million, is being amortized over the life of the agreement. The remaining
carrying value of approximately $2.5 million at December 31, 2001 is included in
other assets.

(10) 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 Microsoft
Agreement. Under the New Microsoft Agreement, Microsoft prepaid to us $40.0
million for the upsell or deployment of enablement products (storefronts, e-
commerce centers and marketplace managers) on their behalf through April 2002.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Agreement we paid approximately $0.5 million and $29.4 million to Microsoft
during the years ended December 31, 2001 and 2000, respectively. Under the
Original Microsoft Agreement we also made royalty payments to Microsoft of
approximately $0.2 million and $0.5 million for the years ended December 31,
2001 and 2000, respectively, related to additional storefronts and e-commerce
centers sold by us.

Converge

In December 2000, we entered into a subscription license agreement and
professional services agreements with Converge, which among other things,
provided for us to receive an aggregate of $108.0 million during the three-year
term of the agreements. On October 9, 2001, Verticalnet 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 as well as the maintenance
and support agreement had a term of 18 months ending in March 2003. The expected
contractual payments under the new agreements plus the remaining deferred
revenue under the original agreements are being recognized on a straight-line
basis through March 2003. The agreements were subsequently amended in February
2002 (see Note 22).

Below are the contractual payments, including revisions, either made or
still expected from Converge under the revised terms of the agreements:

CONTRACTUAL REMAINING
PAYMENTS UNDER ADJUSTMENTS DUE TO CASH RECEIVED CONTRACTUAL PAYMENTS
ORIGINAL OCTOBER 2001 DURING THE YEAR ENDED AS OF
AGREEMENTS CONTRACTUAL CHANGES DECEMBER 31, 2001 DECEMBER 31, 2001
-------------- ------------------- ---------------------- --------------------
(IN THOUSANDS)

Subscription license...... $ 73,000 $(23,000) $(41,000) $ 9,000
Professional services..... 35,000 (23,750) (11,250) --
Maintenance and support... -- 4,500 (750) 3,750
-------- -------- -------- -------
$108,000 $(42,250) $(53,000) $12,750
======== ======== ======== =======

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued Expenses

Accrued expenses consist of the following:

DECEMBER 31,
------------------
2001 2000
------- -------
(IN THOUSANDS)

Accrued costs of disposal of discontinued operations..... $ -- $49,037
Accrued compensation and related costs................... 6,407 13,286
Accrued acquisition related costs........................ 5,469 92
Accrued restructuring costs.............................. 7,082 --
Accrued taxes............................................ 2,586 1,894
Accrued professional fees................................ 808 1,017
Accrued interest payable................................. 825 298
Other.................................................... 2,351 1,627
------- -------
$25,528 $67,251
======= =======

Other Current Liabilities

We have a put/call agreement with BT whereby we can purchase their
remaining 10% interest in Verticalnet Europe at any time after March 13, 2002
and BT may sell its investment to us at any time after March 13, 2002 (see Notes
3 and 22). The fair value of the put/call price of approximately $13.6 million
is included in other current liabilities on the consolidated balance sheet as of
December 31, 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.

(12) LONG-TERM DEBT AND CONVERTIBLE NOTES

Long-term debt and convertible notes consist of the following:

DECEMBER 31,
------------------
2001 2000
------- -------
(IN THOUSANDS)

Capital leases........................................... $ 1,896 $ 2,549
Convertible notes,....................................... 21,705 21,705
------- -------
23,601 24,254
Less: current portion.................................... (1,346) (1,597)
------- -------
Long-term debt and convertible notes..................... $22,255 $22,657
======= =======

In September and October of 1999, we completed the sale of $115.0 million
of 5 1/4% convertible subordinated debentures in a private placement transaction
pursuant to Section 4(2) of the Securities Act of 1933, resulting in net
proceeds of $110.9 million. The debentures have a maturity date of September 27,
2004 with semi-annual interest payments due on March 27 and September 27 of each
year beginning March 27, 2000. The debentures are convertible into shares of our
common stock at an initial conversion price of $20 per share, subject to
adjustment under certain circumstances. On February 11, 2000, we filed a
registration statement with the Securities and Exchange Commission covering the
convertible subordinated debentures and the shares of common stock underlying
the debentures. The registration statement was declared effective on April 7,
2000. We may redeem the debentures if the price of our common stock is above $34
per share for at least 20 trading days during the 30-day trading period ending
on the trading day before we mail notice that
78

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

we intend to redeem the debentures. If we redeem the debentures, we must redeem
at a price equal to 101.3125% of the principal amount, pay any accrued but
unpaid interest and make an interest make-whole payment equal to the present
value of the interest that would have accrued from the redemption date through
September 26, 2002.

In April 2000, approximately $93.3 million of the 5 1/4% convertible
subordinated debentures were converted into 4,664,750 shares of common stock. In
connection with the conversion, we made an inducement payment of approximately
$11.2 million to the related debt holders which is included in other income
(expense) and wrote off against additional paid-in capital approximately $2.9
million in deferred debt offering costs attributable to the portion of debt
converted to equity.

We have several capital leases with various financial institutions for
computer and communications equipment used in operations with lease terms
ranging from three to five years. Additionally, we have an insurance premium
financing agreement for directors and officers liability insurance. The interest
rates under the leases and insurance premium financing agreement range from 8%
to 20%. At December 31, 2001 and 2000, the book value of assets held under
capital leases were approximately $0.3 million and $2.6 million, respectively,
and the aggregate remaining minimum lease and financing agreement payments at
December 31, 2001 were approximately $2.1 million, including interest of
approximately $0.2 million.

At December 31, 2001, long-term debt and capital lease obligations will
mature as follows (in thousands):

2002....................................................... $ 1,347
2003....................................................... 392
2004....................................................... 21,855
2005....................................................... 7
-------
Total................................................. $23,601
=======

(13) COMMITMENTS AND CONTINGENCIES

We have entered into non-cancelable obligations with service providers.
Under these agreements, our commitments as of December 31, 2001 are as follows
(in thousands):

2002...................................................... $862
2003...................................................... 50

Future minimum lease payments as of December 31, 2001 for our buildings
leases are as follows (in thousands):

2002...................................................... $3,310
2003...................................................... 3,034
2004...................................................... 2,881
2005...................................................... 2,203
2006...................................................... 1,748
Thereafter.................................................. 3,613

These future minimum lease payments include all building leases for which
we are contractually committed to make payments. We are in the process, however,
of trying to terminate various facility leases which represent approximately
$13.5 million of the payments in the above amounts. We currently estimate the
termination costs of these leases to be approximately $5.1 million, which is
included in accrued expenses. Rent

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expense under noncancelable operating leases was approximately $3.1 million,
$4.1 million and $1.3 million for the years ended December 31, 2001, 2000 and
1999, respectively.

(14) LITIGATION

On June 12, 2001, a class action lawsuit was filed against us and several
of our 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 3,500,000
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 at progressively
higher prices after the IPO. With respect to Verticalnet, 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; Hoang v. Verticalnet, et al., C.A. No. 01-CV-6864; Morris v.
Verticalnet, et al., C.A. No. 01-CV-9459, and Murphy v. Verticalnet, et al.,
C.A. No. 01-CV-8084. None of the complaints state the amount of any damages
being sought, but do ask the court to award "rescissory damages." We have
retained counsel and intend to vigorously defend ourselves in connection with
the allegations raised in the CJA Action and the other complaints. In addition,
we intend to enforce our indemnity rights with respect to the underwriters who
are also named as defendants in the complaints.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. We have retained
counsel to defend against the lawsuit and filed a motion to dismiss the action
on October 12, 2001. The plaintiffs filed an amended complaint on October 24,
2001, and we answered the amended complaint on November 13, 2001. We intend to
defend ourselves vigorously in the lawsuit and to enforce our rights pursuant to
the acquisition of RWE.

(15) CAPITAL STOCK

At December 31, 2001, our amended and restated Articles of Incorporation
provide us the authority to issue 1,000,000,000 shares of common stock and
10,000,000 shares of blank check preferred stock.

Common Stock

On January 22, 2001, we sold approximately 2,800,000 shares of our common
stock to Sumitomo for $15.0 million. Under the agreement, Sumitomo may not
transfer the purchased shares for one year from the closing date of the
transaction. Sumitomo was also granted limited demand and piggyback registration
rights exercisable after the first anniversary of the closing.

Series A 6.00% Convertible Redeemable Preferred Stock

In April 2000, Microsoft made a $100.0 million equity investment in
Verticalnet through the purchase of 100,000 shares of our Series A 6.00%
convertible redeemable preferred stock ("Series A Preferred Stock"), which were
initially convertible into 1,151,080 shares of our common stock, and the
warrants described below. On April 1, 2010, at the election of the holder of the
Series A Preferred Stock, we shall be required to redeem all outstanding shares
of Series A Preferred Stock at a specified price. In addition, at our option,
each share of Series A Preferred Stock will be subject to redemption at a
calculated price if certain conditions are met. Microsoft is entitled to
registration rights and has the right to nominate one member of our board of
directors. The warrants Microsoft received entitle Microsoft to purchase
1,500,000 shares of our common stock at an exercise price of $69.50 per share,
subject to adjustment under certain circumstances.

Based on an independent valuation of the Series A Preferred Stock and the
warrants issued to Microsoft, fair values of $89.5 million and $18.0 million
were recorded, respectively. The fair value of the warrants was
81

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded as additional paid-in capital. The approximately $7.6 million excess of
the fair value over the actual cash received was recorded as a deferred cost in
other assets and is being amortized to expense on a straight-line basis over the
period of the commercial agreement.

Holders of the Series A Preferred Stock are entitled to cumulative
preferred dividends accumulating at a rate of 6.00% of the liquidation
preference ($1,000 per share) per year, payable quarterly in arrears on January
1, April 1, July 1 and October 1 of each year. Dividends may be paid in cash,
additional Series A Preferred Stock or common stock. As of December 31, 2001,
cumulative dividends of approximately $10.9 million have been earned, of which
approximately $9.3 million have been paid to Microsoft through the issuance of
additional shares of Series A Preferred Stock. Additionally, the accretion
related to the Series A Preferred Stock was approximately $1.0 million and $0.8
million, respectively, during the years ended December 31, 2001 and 2000.

We may not declare or pay, or set aside funds to pay, any dividend or other
distribution to the holders of our common stock or any other security ranking
junior to the Series A Preferred Stock unless we have previously declared and
paid, or set aside funds to pay, all dividends for preceding dividend periods to
which the holders of the Series A Preferred Stock are entitled. In the event of
liquidation, the holders of the Series A Preferred Stock will receive a
liquidation preference in the amount of $1,000 per share, plus any accumulated
and unpaid dividends, before any distribution is made to common shareholders.

Based on the guidance in EITF Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock, for which a consensus was reached in the fourth quarter of 2000, the
Series A Preferred Stock has been classified outside of shareholders' equity
(deficit).

Warrants

Outstanding warrants as of December 31, 2001 and 2000 consist of the
following:

NUMBER OF
DATE GRANTED WARRANTS EXERCISE PRICE EXPIRATION DATE
------------ --------- -------------- ---------------

April 1997 15,480 $ 0.19 April 2007
November 1998 364,672 0.88 November 2008
November 1998 246,878 4.00 November 2008
April 2000 1,500,000 69.50 April 2010

Stock Option Plans

In December 1996, our board of directors adopted the 1996 Equity
Compensation Plan. Employees, key advisors and non-employee directors are
eligible to receive awards under this plan. A total of 14,400,000 shares of
common stock are reserved for issuance under this plan. At December 31, 2001,
approximately 2,000,000 of these shares remain available for grant.

In August 1999, our board of directors adopted the 1999 Equity Compensation
Plan. A total of 1,200,000 shares of common stock are reserved for issuance to
our employees under this plan. At December 31, 2001, approximately 400,000 of
these shares remain available for grant.

In October 1999, our board of directors adopted the Equity Compensation
Plan for Employees (1999). A total of 18,500,000 shares of common stock are
reserved for issuance to our employees under this plan. At December 31, 2001,
approximately 6,700,000 of these shares remain available for grant.

In April 2000, our board of directors adopted the Verticalnet, Inc. 2000
Equity Compensation Plan. It was approved by our shareholders in June 2000. A
total of 10,000,000 shares of common stock are reserved for

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issuance to our employees, non-employee directors, consultants and advisors
under this plan. At December 31, 2001, approximately 1,800,000 of these shares
remain available for grant.

In December 2001, our board of directors assumed the Atlas Commerce, Inc.
1999 Long Term Incentive Plan. A total of approximately 2,600,000 shares of
common stock are reserved for issuance to our employees, non-employee directors,
consultants and advisors under this plan. At December 31, 2001 approximately
1,000,000 of these shares remain available for grant.

The exercise price for the options is determined by our board of directors,
but shall not be less than 100% of the fair market value of the common stock on
the date of grant. Generally, the options vest over a two-year period after the
date of grant and expire ten years after the date of grant. Option holders that
terminate their employment generally forfeit all non-vested options.

The following table summarizes the activity for stock option plans:

WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
----------- --------------

Outstanding at December 31, 1998.................. 8,335,444 $ 0.67
Options granted................................... 9,928,620 30.46
Options exercised................................. (2,214,908) 0.63
Options cancelled................................. (544,140) 4.35
-----------
Outstanding at December 31, 1999.................. 15,505,016 19.58
Options granted................................... 21,126,782 43.65
Options exercised................................. (3,806,101) 6.84
Options cancelled................................. (6,544,936) 40.52
-----------
Outstanding at December 31, 2000.................. 26,280,761 34.44
Options granted................................... 27,162,810 1.52
Options exercised................................. (1,473,566) 0.68
Options cancelled................................. (23,572,686) 28.13
-----------
Outstanding at December 31, 2001.................. 28,397,319 10.02
===========

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables summarize information about stock options outstanding
at December 31, 2001.

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------

$ 0.00 - 0.01 54,049 8.7 $ 0.01 54,049 $ 0.01
0.07 - 0.07 40,063 5.3 0.07 40,063 0.07
0.20 - 0.29 1,202,340 5.9 0.21 1,182,875 0.21
0.34 - 0.48 9,546,361 9.6 0.35 100,500 0.34
0.62 - 0.91 1,040,712 6.3 0.67 746,958 0.66
0.97 - 1.45 301,760 8.1 1.22 196,704 1.20
1.55 - 2.10 6,811,760 8.0 1.93 3,142,177 1.94
2.36 - 3.13 646,735 9.8 2.42 572,120 2.43
3.91 - 4.53 1,861,544 2.2 4.43 1,741,127 4.46
5.91 - 6.66 802,536 7.9 6.04 718,786 6.05
11.01 - 16.50 334,052 5.9 14.32 262,581 14.12
16.97 - 25.06 1,361,779 7.1 19.71 964,319 19.38
25.69 - 38.31 2,057,132 6.0 30.79 1,460,028 30.01
38.63 - 57.19 780,932 7.5 43.92 372,572 43.94
58.00 - 77.75 1,099,068 5.3 68.58 742,986 68.85
91.50 - 136.59 452,496 4.7 103.77 315,340 103.80
138.88 - 138.88 4,000 0.2 138.88 4,000 138.88
---------- ----------
28,397,319 12,617,185
========== ==========

We apply APB No. 25 and related interpretations in accounting for our stock
option plans. Had compensation cost been recognized pursuant to SFAS No. 123,
our net loss would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):

YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
--------- --------- --------

Loss attributable to common shareholders:
As reported.................................... $(768,272) $(316,580) $(53,480)
Pro forma...................................... $(788,748) $(518,031) $(54,926)
Pro forma loss per common share:
As reported.................................... $ (7.93) $ (3.81) $ (0.86)
Pro forma...................................... $ (8.14) $ (6.23) $ (0.88)

The per share weighted-average fair value of options issued by us during
2001, 2000 and 1999 was $1.20, $40.14 and $21.77, respectively.

The following range of assumptions were used to determine the fair value of
stock options:

2001 2000 1999
---------- ---------- ----------

Dividend yield.................................. 0% 0% 0%
Expected volatility............................. 120% 120% 100%
Average expected option life.................... 3.97 years 3.85 years 4.09 years
Risk-free interest rate......................... 4.2% 6.2% 5.7%

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employee Stock Purchase Plan

In January 1999, our board of directors adopted the Employee Stock Purchase
Plan for all employees meeting its eligibility criteria. Under this plan,
eligible employees may purchase shares of our common stock, subject to certain
limitations, at 85% of the market value. Purchases are limited to 10% of an
employee's eligible compensation, up to a maximum of 4,000 shares per purchase
period. In April 2000, our board of directors approved an amendment, approved by
the shareholders in June 2000, to increase the number of shares reserved under
the plan from 1,200,000 to 2,000,000. At December 31, 2001, approximately
1,500,000 of these shares remain available.

(16) LOSS PER SHARE

The following table sets forth the computation of net loss per share (in
thousands, except per share data):

YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
--------- --------- --------

Loss from continuing operations.................. $(756,949) $(202,330) $(52,589)
Less: Series A convertible redeemable preferred
stock dividends and accretion.................. (7,420) (5,264) --
--------- --------- --------
Loss from continuing operations attributable to
common shareholders............................ (764,369) (207,594) (52,589)
Loss from discontinued operations................ -- (27,018) (891)
Loss on disposal of discontinued operations...... (3,903) (81,968) --
--------- --------- --------
Net loss attributable to common shareholders..... $(768,272) $(316,580) $(53,480)
========= ========= ========
Basic and diluted loss per common share:
Continuing operations.......................... $ (7.89) $ (2.50) $ (0.84)
Loss from discontinued operations.............. -- (0.32) (0.02)
Loss on disposal of discontinued operations.... (0.04) (0.99) --
--------- --------- --------
Loss per common share............................ $ (7.93) $ (3.81) $ (0.86)
========= ========= ========

Common stock equivalents of approximately 7,200,000, 15,600,000 and
17,600,000, have been excluded from the calculation because their effect was
anti-dilutive for the years ended December 31, 2001, 2000 and 1999,
respectively.

(17) DEFINED CONTRIBUTION PLAN

In 1997, we established a defined contribution plan for qualified employees
as defined under the plan. Participants may contribute 1% to 15% of their
pre-tax compensation, as defined, to the plan. Under the plan, we can make
discretionary contributions. To date, we have not made any contributions to the
plan.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(18) INCOME TAXES

The components of the net deferred tax assets as of December 31, 2001 and
2000 consist of the following:

DECEMBER 31,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)

Deferred tax assets:
Net operating losses............................... $ 233,910 $ 182,955
Reserves........................................... 1,309 2,321
Depreciation and amortization...................... 13,992 7,798
Deferred revenue and other......................... 12,048 6,156
Disposition of segment............................. -- 35,986
Investment impairment.............................. 96,411 --
--------- ---------
Total gross deferred tax assets................. 357,670 235,216
Valuation allowance.................................. (336,247) (202,632)
--------- ---------
21,423 32,584
Deferred tax liabilities:
Internally developed software costs................ (2,372) (2,461)
Identifiable intangibles........................... -- (2,966)
Gain on investment................................. (19,051) (27,157)
--------- ---------
Total deferred tax liabilities.................. (21,423) (32,584)
--------- ---------
Net deferred tax asset............................... $ -- $ --
========= =========

Deferred income taxes reflect the net effects of net operating loss
carryforwards and temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which temporary differences representing net future deductible
amounts become deductible. Due to the uncertainty of our ability to realize the
benefit of the deferred tax assets, the deferred tax assets are fully offset by
a valuation allowance at December 31, 2001 and 2000. The net change in the
valuation allowance for deferred tax assets at December 31, 2001 and 2000 was an
increase of $133.6 million and $163.4 million, respectively.

As of December 31, 2001, we have approximately $554.5 million of net
operating loss carryforwards for federal income tax purposes. These
carryforwards will begin expiring in 2011 if not utilized. In addition, we have
net operating loss carryforwards of approximately $554.5 million in certain
states with various expiration periods beginning in 2002. The majority of state
net operating losses are subject to a $2.0 million annual limitation and begin
expiring in 2006.

Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforwards is limited following a change in ownership of
greater than 50% within a three-year period. Due to our prior equity
transactions, our net operating loss carryforwards are subject to an annual
limitation generally determined by multiplying our market value on the date of
the ownership change by the federal long-term tax exempt rate. Any amount
exceeding the annual limitation may be carried forward to future years for the
balance of the net operating loss carryforward period.

Included in the pre-limitation net operating loss carryforwards are losses
that were generated by companies acquired in 2001, 2000 and 1999. The losses
generated by acquired companies prior to their

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

acquisition generally are available to offset future taxable income of the
acquiring company. However, upon the acquisition of these companies, their net
operating losses of approximately $28.1 million became subject to an annual
limitation of approximately $3.6 million.

Additionally, at December 31, 2001, approximately $87.2 million of the
gross deferred tax asset will reduce equity and approximately $9.5 million of
the gross deferred tax asset will reduce goodwill to the extent such assets are
realized.

(19) OTHER INCOME (EXPENSE)

Other income (expense) was comprised of the following:

YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ---------
(IN THOUSANDS)

Net gain (loss) on investments (see Note 9)........... $ (3,829) $ 79,875
Conversion inducement payment (see Note 12)........... -- (11,207)
Impairment charge related to cost method, equity
method and available-for-sale investments (see Note
9).................................................. (231,327) (6,439)
Loss from equity method investments (see Note 9)...... (2,312) (2,769)
Other income (expense) items.......................... 1,118 --
--------- --------
Other income (expense), net...................... $(236,350) $ 59,460
========= ========

(20) SEGMENT INFORMATION

Following the sale of Verticalnet Exchanges in the first quarter of 2001,
management began evaluating the financial operating performance of the business
as two distinct business units, the SMB group and the Enterprise group, formerly
referred to as Verticalnet Markets and Verticalnet Solutions, respectively. 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 SMB 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) excluding non-cash
expenses, 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 SMB group.
Corporate costs were approximately $30.1 million and $37.0 million,
respectively, for the years ended December 31, 2001 and 2000.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEAR ENDED DECEMBER 31, 2001
------------------------------------------
ENTERPRISE GROUP
(INCLUDING
SMB GROUP CORPORATE COSTS) TOTAL
--------- ---------------- ---------
(IN THOUSANDS)

Revenues...................................... $ 89,962 $ 35,608 $ 125,570
Income (loss), excluding non-cash expenses,
other non recurring items and preferred
stock dividends............................. 1,410 (55,515) (54,105)
Restructuring and asset impairment charge..... (76,917) (268,625) (345,542)
Amortization of goodwill and other intangible
assets, net................................. (10,002) (111,724) (121,726)
In-process research and development charge.... -- (420) (420)
Investment impairments........................ -- (231,327) (231,327)
Net loss on investments....................... -- (3,829) (3,829)
Discontinued operations....................... -- (3,903) (3,903)
Preferred stock dividends and accretion....... -- (7,420) (7,420)
Loss attributable to common shareholders...... (85,509) (682,763) (768,272)
Segment assets................................ 15,107 110,524 125,631

YEAR ENDED DECEMBER 31, 2000
------------------------------------------
ENTERPRISE GROUP
(INCLUDING
SMB GROUP CORPORATE COSTS) TOTAL
--------- ---------------- ---------
(IN THOUSANDS)

Revenues...................................... $104,548 $ 7,906 $ 112,454
Loss, excluding non-cash expenses, other non
recurring items and preferred stock
dividends................................... (31,235) (66,381) (97,616)
Restructuring and asset impairment charges.... (11,530) -- (11,530)
Non-cash, general and administrative expenses
including stock compensation expense,
terminated deal costs and write-off of
obsolete assets............................. -- (5,572) (5,572)
Amortization of goodwill and other intangible
assets, net................................. (13,771) (126,070) (139,841)
In-process research and development charge.... -- (10,000) (10,000)
Investment impairments........................ -- (6,439) (6,439)
Net gain on investments....................... -- 79,875 79,875
Conversion payment to debt holders............ -- (11,207) (11,207)
Discontinued operations....................... -- (108,986) (108,986)
Preferred stock dividends and accretion....... -- (5,264) (5,264)
Loss attributable to common shareholders...... (56,536) (260,044) (316,580)
Segment assets................................ 168,547 754,737 923,284

"Income (loss), excluding non-cash expenses, other non recurring items and
preferred stock dividends" is used by our management for purposes of making
decisions about allocating resources and assessing performance of our segments.
However this caption is not intended to reflect segment results of operations in
accordance with generally accepted accounting principles.

Capital expenditures including capitalized software costs were $9.1 million
and $5.7 million for the SMB group and Enterprise group, respectively, for the
year ended December 31, 2001. Prior year comparative information is not readily
available.

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(21) SUMMARIZED QUARTERLY DATA (UNAUDITED)

The quarterly results of operations for the years ended December 31, 2001
and 2000 were as follows (in thousands, except per share data):

QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ -----------

2001
Revenues........................... $ 36,687 $ 33,056 $ 31,755 $ 24,072
Loss from continuing operations
attributable to common
shareholders..................... $(91,644) $(302,481) $(241,649) $(128,595)
Loss on disposal of discontinued
operations....................... (522) (3,381) -- --
-------- --------- --------- ---------
Loss attributable to common
shareholders..................... $(92,166) $(305,862) $(241,649) $(128,595)
======== ========= ========= =========
Basic and diluted loss per share:
Continuing operations............ $ (0.99) $ (3.10) $ (2.46) $ (1.30)
Loss on disposal of discontinued
operations.................... -- (0.03) -- --
-------- --------- --------- ---------
$ (0.99) $ (3.13) $ (2.46) $ (1.30)
======== ========= ========= =========

QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------

2000
Revenues............................. $12,863 $ 24,445 $ 34,455 $ 40,690
Income (loss) from continuing
operations attributable to common
shareholders....................... $46,699 $(84,217) $(76,082) $ (93,994)
Income (loss) from discontinued
operations......................... (4,606) (2,931) 68 (19,549)
Loss on disposal of discontinued
operations......................... -- -- -- (81,968)
------- -------- -------- ---------
Income (loss) attributable to common
shareholders....................... $42,093 $(87,148) $(76,014) $(195,511)
======= ======== ======== =========
Basic income (loss) per common share:
Continuing operations.............. $ 0.62 $ (1.01) $ (0.88) $ (1.07)
Loss from discontinued
operations...................... (0.06) (0.04) -- (0.23)
Loss on disposal of discontinued
operations...................... -- -- -- (0.93)
------- -------- -------- ---------
$ 0.56 $ (1.05) $ (0.88) $ (2.23)
======= ======== ======== =========
Diluted income (loss) per common
share:
Continuing operations.............. $ 0.49 $ (1.01) $ (0.88) $ (1.07)
Loss from discontinued
operations...................... (0.04) (0.04) -- (0.23)
Loss on disposal of discontinued
operations...................... -- -- -- (0.93)
------- -------- -------- ---------
$ 0.45 $ (1.05) $ (0.88) $ (2.23)
======= ======== ======== =========

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(22) SUBSEQUENT EVENTS

Amendments to the Converge Agreements

Verticalnet and Converge entered into a first amendment to the amended and
restated subscription license agreement and a first amendment to the maintenance
and support agreement, both as of February 1, 2002. As a result of these
amendments, the term of each agreement was extended to December 31, 2003. The
amendment to the maintenance agreement reduced our required level of service,
accelerated the payment terms and reduced their aggregate obligation by $0.5
million. From January 1, 2002 through March 15, 2002, we have received
approximately $6.1 million from Converge in 2002, with the remaining aggregate
payments of approximately $6.2 million expected over the balance of fiscal year
2002 per the terms of the amended. The expected contractual payments under the
new agreements plus the remaining deferred revenue under the original agreements
will be recognized on a straight-line basis through December 2003 (see Note 10).

Announcement of Our Intention to Sell SMB

On February 13, 2002, we announced our intention to sell the SMB group. Our
board of directors authorized this action to complete our strategic realignment
to an enterprise software business. Beginning in the first quarter of 2002, we
will report the SMB group as a discontinued operation.

Converge Investment

Appointment of Chief Executive Officer and Chief Financial Officer

On February 19, 2002, Kevin S. McKay, a member of our board of directors,
was appointed president and chief executive officer of Verticalnet. Mr. McKay
succeeded Michael Hagan, who was appointed chairman of Verticalnet. On February
13, 2002, John A. Milana, former chief financial officer of Atlas Commerce, was
appointed as Verticalnet's chief financial officer replacing interim chief
financial officer, David Kostman.

Put/Call Arrangement with BT

In February 2002 we agreed with BT to amend the put/call agreement to allow
for an early partial exercise of our call using our common stock. As of March
15, 2002, we have issued 2,000,000 shares of our common stock to BT with an
aggregate value of approximately $1.8 million towards the put and call
obligation. As of March 15, 2002, our put/call liability is approximately $11.8
million (see Note 11).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to our directors may be found under the caption
"Proposal No. 1 -- Election of Directors" in our proxy statement for the 2002
Annual Meeting of Shareholders to be held on June 5, 2002 (the "Proxy
Statement"). Information with respect to our executive officers may be found
under the caption "Executive and Senior Officers" included in Part I of this
report. Such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information in the Proxy Statement set forth under the caption
"Executive Compensation" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information in the Proxy Statement set forth under the caption entitled
"Stock Ownership" is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in the Proxy Statement set forth under the caption entitled
"Certain Relationships and Related Transactions" is incorporated herein by
reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements.

See Item 8 of this report.

2. Financial Statement Schedules.

The following financial statement schedule is filed as part of this report
under Schedule II immediately following the signature page: Schedule
II -- Valuation and Qualifying Accounts. Schedule II should be read in
conjunction with the consolidated financial statements and related notes thereto
set forth under Item 8 of this report. Schedules other than those listed above
have been omitted because they are either not required, not applicable, or the
information has otherwise been included.

3. Exhibits.

See paragraph (c) below.

(b) Reports on Form 8-K. Verticalnet, Inc. filed the following Reports on
Form 8-K during the quarter ended December 31, 2001. On October 11, 2001, we
filed our Current Report on Form 8-K, dated October 10, 2001, regarding (a) an
amendment to Verticalnet's software licensing and professional services
agreements with Converge, Inc., and (b) Verticalnet's expected write-down of its
investment in Converge, Inc. (Item 5)

On October 16, 2001, we filed our Current Report on Form 8-K, dated October
12, 2001, announcing the resignation of Gene S. Godick as Verticalnet's Chief
Financial Officer and the appointment of David Kostman as Interim Chief
Financial Officer. (Item 5)

The following exhibits are filed as part of this report.

EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1 Amended and Restated Articles of Incorporation(1)
3.2 Articles of Amendment to Amended and Restated Articles of
Incorporation(2)
3.3 Articles of Amendment to Amended and Restated Articles of
Incorporation(2)
3.4 Amended and Restated Bylaws(1)
4.1 Indenture, dated September 27, 1999, between Verticalnet,
Inc. and Bankers Trust Company(3)
4.2 Registration Rights Agreement, dated September 27, 1999,
between Verticalnet, Inc. and the initial purchasers of its
5 1/4% Convertible Subordinated Debentures(3)
4.3 Statement with Respect to Shares of Series A 6.00%
Convertible Redeemable Preferred Stock Due 2010 of
Verticalnet, Inc.(4)
4.4 Registration and Lock-Up Agreement, dated as of December 28,
2001, by and among Verticalnet, Inc. and certain
stockholders of Atlas Commerce, Inc.(20)
10.1 Common Stock Purchase Warrant to purchase 40,026 shares of
Common Stock, dated November 25, 1998, issued to Progress
Capital, Inc.(1)
10.2 Form of Common Stock Purchase Warrant, dated November 25,
1998, issued in connection with the Convertible Note(1)
10.3 Series A Preferred Stock Purchase Agreement, dated as of
September 12, 1996, between Internet Capital Group, L.L.C.
and Verticalnet, Inc.(1)
10.4 Series D Investor Rights Agreement, dated as of May 8, 1998,
by and among Verticalnet, Inc. and certain Investors(1)

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.5 Registration Rights Agreement, dated as of November 25,
1998, between Verticalnet, Inc. and the Convertible Note
Holders(1)
10.6 Agreement of Lease, dated April 21, 1999, between Liberty
Property Limited Partnership and Verticalnet, Inc., as
amended by the First Amendment to Lease Agreement, dated May
15, 1999, between Liberty Property Limited Partnership and
Verticalnet, Inc. (700 Dresher Road, Horsham,
Pennsylvania)(5)
10.7 Second Amendment to Lease Agreement, dated March 2, 2000,
between Liberty Property Limited Partnership and
Verticalnet, Inc. (700 Dresher Road, Horsham,
Pennsylvania)(19)
10.8 Third Amendment to Lease Agreement, dated August 1, 2000,
between Liberty Property Limited Partnership and
Verticalnet, Inc. (700 Dresher Road, Horsham,
Pennsylvania)(19)
10.9 Agreement of Lease, dated April 13, 2000, between Liberty
Property Limited Partnership and Atlas Commerce (U.S.) Inc.
(300 Chester Field Parkway, Malvern, Pennsylvania)*
10.10 Agreement and Plan of Merger, dated as of March 8, 2000, by
and among Verticalnet, Inc., VERT Acquisition Corp.,
Tradeum, Inc. and Zvi Schreiber(11)
10.11 Asset Purchase Agreement, dated as of February 16, 2000, by
and among Verticalnet, Inc., NECX.com LLC, RW Electronics,
Inc., RW Electronics Trust, Robert R. Benedict and Peter L.
LeSaffre(12)
10.12 Agreement and Plan of Reorganization, dated as of June 30,
2000, by and among Verticalnet, Inc. NECX.com LLC, F&G
Capital, Inc., trustees of the Binford Living Trust,
trustees of the Carracino Family Trust, trustees of the
Radach Family Trust, James D. Binford, Daniel N. Carracino
and Russel R. Radach(13)
10.13 Membership Interest Purchase Agreement, dated as of December
19, 2000, by and among Converge, Inc., NECX.com LLC and
Verticalnet, Inc.(14)
10.14 Amendment No. 1 to Membership Interest Purchase Agreement,
dated as of January 31, 2001, by and among Converge, Inc.,
NECX.com LLC, Verticalnet, Inc. and Converge International,
Ltd.(15)
10.15 Agreement of Merger, dated December 28, 2001, by and among
Verticalnet, Inc. and Atlas Commerce, Inc.(20)
10.16 Subscription License Agreement, dated as of December 19,
2000, among Verticalnet, Inc., Tradeum, Inc. d/b/a
Verticalnet Solutions and Converge, Inc.*
10.17 First Amendment to Subscription License Agreement, dated as
of January 31, 2001, among Verticalnet, Inc., Verticalnet
Solutions LLC and Converge, Inc.*
10.18 Amended and Restated Subscription License Agreement, dated
as of October 9, 2001, between Verticalnet, Inc.,
Verticalnet Enterprises LLC and Converge, Inc.*
10.19 Maintenance and Support Agreement, dated October 9, 2001,
between Verticalnet, Inc., Verticalnet Enterprises LLC and
Converge, Inc.*
10.20 First Amendment to the Amended and Restated Subscription
License Agreement, dated as of February 1, 2002, between
Verticalnet, Inc., Verticalnet Enterprises LLC and Converge,
Inc.*
10.21 First Amendment to Maintenance and Support Agreement, dated
as of February 1, 2002, between Verticalnet, Inc.,
Verticalnet Enterprises LLC and Converge, Inc.*
10.22 Amended and Restated 1996 Equity Compensation Plan(1)(18)
10.23 1999 Equity Compensation Plan(3)(18)
10.24 Verticalnet, Inc. 2000 Equity Compensation Plan(16)(18)
10.25 Amended and Restated Equity Compensation Plan for
Employees(17)(18)
10.26 Employment Agreement, dated April 25, 2001, between
Verticalnet, Inc. and Christopher Larsen*

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.27 Employment Agreement, dated October 1, 2001, between
Verticalnet, Inc. and James W. McKenzie, Jr.*
10.28 Employment Agreement, dated October 1, 2001, between
Verticalnet, Inc. and Michael J. Hagan*
10.29 Employment Agreement, dated October 1, 2001, between
Verticalnet, Inc. and David Kostman*
21 Subsidiaries of the Registrant*
23 Consent of KPMG LLP*
99.1 Promissory Note, dated as of December 31, 2000(14)

---------------

* Filed herewith.

(1) Filed as an exhibit to the registrant's Registration Statement on Form S-1
(Registration No. 333-68053) filed with the Commission on November 27,
1998, as amended.

(2) Filed as an exhibit to the registrant's report on Form 10-Q dated September
30, 2000.

(3) Filed as an exhibit to the registrant's report on Form 10-Q dated September
30, 1999.

(4) Filed as an exhibit to the registrant's report on Form 8-K dated April 14,
2000.

(5) Filed as an exhibit to the registrant's report on Form 10-Q dated June 30,
1999.

(6) Filed as an exhibit to the registrant's report on Form 8-K dated June 29,
1999.

(7) Filed as an exhibit to the registrant's report on Form 8-K dated July 29,
1999.

(8) Filed as an exhibit to the registrant's report on Form 8-K dated August 10,
1999.

(9) Filed as an exhibit to the registrant's report on Form 8-K dated August 25,
1999.

(10) Filed as an exhibit to the registrant's report on Form 8-K dated December
16, 1999.

(11) Filed as an exhibit to the registrant's report on Form 8-K dated March 23,
2000.

(12) Filed as an exhibit to the registrant's report on Form 8-K dated March 31,
2000.

(13) Filed as an exhibit to the registrant's report on Form 8-K dated July 13,
2000.

(14) Filed as an exhibit to the registrant's report on Form 8-K dated December
19, 2000.

(15) Filed as an exhibit to the registrant's report on Form 8-K dated January
31, 2001.

(16) Filed as Annex B to the registrant's definitive proxy statement on Schedule
14A, which was filed on April 27, 2000. This exhibit was approved by the
registrant's shareholders at the registrant's 2000 Annual Meeting.

(17) Filed as an exhibit to the registrant's report on Form 10-K dated December
31, 1999.

(18) Compensatory plans and arrangements for executives and others.

(19) Filed as an exhibit to the registrant's report on Form 10-K dated December
31, 2000.

(20) Filed as an exhibit to the registrant's report on Form 8-K dated January 4,
2002.

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 April 1, 2002.

VERTICALNET, INC.

BY: /s/ JOHN A. MILANA
------------------------------------
John A. Milana
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of registrant
and in the capacities indicated on April 1, 2002.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ MICHAEL J. HAGAN Chairman of the Board and Director April 1, 2002
---------------------------------------------------
Michael J. Hagan

/s/ KEVIN S. MCKAY President, Chief Executive Officer April 1, 2002
--------------------------------------------------- and Director (principal executive
Kevin S. McKay officer)

/s/ JOHN A. MILANA Chief Financial Officer (principal April 1, 2002
--------------------------------------------------- financial officer and accounting
John A. Milana officer)

/s/ JEFFREY C. BALLOWE Director April 1, 2002
---------------------------------------------------
Jeffrey C. Ballowe

/s/ ROBERT F. BERNSTOCK Director April 1, 2002
---------------------------------------------------
Robert F. Bernstock

/s/ WALTER W. BUCKLEY, III Director April 1, 2002
---------------------------------------------------
Walter W. Buckley, III

/s/ HOWARD D. ROSS Director April 1, 2002
---------------------------------------------------
Howard D. Ross

/s/ MARK L. WALSH Director April 1, 2002
---------------------------------------------------
Mark L. Walsh

VERTICALNET, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)

BALANCE AT THE CHARGE TO BALANCE AT
BEGINNING OF COSTS AND THE END OF
THE YEAR EXPENSES WRITE-OFFS OTHER(1) THE YEAR
-------------- ---------- ----------- -------- ----------

Allowance for doubtful
accounts:
December 31, 1999......... $ 61 $ 807 $ (127) $ 61 $ 802
December 31, 2000......... 802 2,372 (1,102) -- 2,072
December 31, 2001......... 2,072 1,237 (2,308) (14) 987

---------------
(1) Allowance balances were recorded in connection with acquisitions and
dispositions during fiscal years 1999, 2000 and 2001. All amounts reflect
activity from continuing operations.