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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 0-26811

Nexprise, Inc.

5950 La Place Court, Suite 200, Carlsbad, CA 92008

Registrant’s telephone number, including area code:

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

Common Stock, $.0002 par value

      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 þ          No o

      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.     þ

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

      At June 28, 2002, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $14,517,000

      At February 28, 2003, the number of shares of Common Stock outstanding was 3,226,471

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Company’s 2003 Annual Meeting of

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NEXPRISE, INC.

FORM 10-K ANNUAL REPORT

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PART 1

Item 1.     Business

Overview

      NexPrise, Inc. (the “Company”, “NexPrise”, “us”, “our” or “we”), formerly known as Ventro Corporation and, prior thereto, as Chemdex Corporation, is a seller of business process applications. We develop and market software solutions that can enable manufacturers to rapidly automate key business processes. These solutions complement and expand on currently installed enterprise systems and accommodate ongoing process improvements as companies require to meet their changing business demands. In 2002 we acquired privately-held InfoPrise, Inc. (“InfoPrise”) and combined its data management technology with our existing collaborative solutions infrastructure to produce the business process automation applications and development platform that are now our primary product offerings. We also continued streamlining the operation to reduce commitments and operating expenses and conserve cash. We terminated a significant real estate lease, lowered headcount from 90 at the end of 2001 to 45 at the end of 2002 and reduced non-personnel expenses. These reductions lowered operating expenses from approximately $5.6 million in the first quarter of 2002 to approximately $2.6 million in the fourth quarter of 2002, excluding a fourth quarter non-cash charge of approximately $11.7 million for impairment of goodwill.

      The Company originally was incorporated as Chemdex Corporation in September 1997 in Delaware. In February 2000, we changed our name to Ventro Corporation and in January 2002, we renamed the company NexPrise, Inc. to reflect the focus on the solutions and customers acquired in August 2001. Our principal offices are located at 5950 La Place Court, Suite 2000, Carlsbad, California, 92008. Our telephone number is (760) 804-1333. Investors may access our filings with the Securities and Exchange Commission on our website, which is located on the Internet at www.nexprise.com, but the information on our website does not constitute part of this Annual Report.

      In April 2002, the Company effected a reverse split of its common stock. As a result of the reverse stock split, every 15 issued and outstanding shares of the Company’s old common stock were converted into one share of new common stock. The reverse split brought the minimum bid price per share of the Company’s common stock into compliance with the listing requirements of the Nasdaq National Market. The financial data contained in this report has been adjusted to reflect the reverse stock split.

      For 2003, our focus is to further develop our product offering, to increase our customer base and revenue and to move our operations closer to generating positive cash flow.

InfoPrise Acquisition and Organizational Changes

      In February 2002, NexPrise acquired privately held InfoPrise, a provider of data management solutions located in Carlsbad, California. As consideration for the acquisition, NexPrise issued to InfoPrise’s stockholders an aggregate of 139,790 shares of NexPrise common stock together with unsecured convertible promissory notes with a face value of $3,040,000 due 2007. The notes bear interest at a rate of 6% per year and are convertible to the Company’s common stock at $18.75 per share. NexPrise also assumed InfoPrise’s outstanding stock options, which may result in the issuance of up to approximately 64,000 shares of NexPrise common stock if all of the assumed options are exercised.

      Following the InfoPrise acquisition, the Company relocated its principal executive office to Carlsbad, California. The product development and marketing teams were also consolidated into the Carlsbad location. The combined entity now operates as one organization and continues to develop and sell our product offering.

Customers and Backlog

      We target large-to-medium size organizations, primarily in North America. Our installed base of customers represents numerous industries. The aerospace and defense and automotive industries are particularly well represented. During 2002, approximately 17% of our revenues were from three entities of The Boeing Company, approximately 13% were from Sikorsky Aircraft Corporation, approximately 12% were from

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      NexPrise’s backlog was approximately $1.9 million at December 31, 2002. Backlog includes only orders for which delivery will occur within 12 months and for which revenue has not been recognized. In addition, backlog includes service revenue and maintenance fees to be earned within the next 12 months. However, customers may delay delivery of products or cancel orders suddenly and without notice, subject to possible cancellation penalties. Due to these possible changes, NexPrise’s backlog at any particular date is not necessarily indicative of actual sales for any succeeding period.

Asset Sale

      In August 2002, the Company sold its interest in Amphire, one of the marketplaces formed in 2000 that we provided services to until 2001 and in which we continued to hold an equity position. Under the terms of the agreement, NexPrise sold all of its shares of Amphire common stock for $2 million in cash to parties unaffiliated with NexPrise. The transaction resulted in a gain of approximately $1.8 million reported in the quarter ending September 30, 2002.

Marketing, Sales, and Support

      Our current marketing, sales, and support activities relate to building NexPrise’s brand identity, determining product direction, building our customer base, and managing and serving customer accounts. We sell our product through a direct sales force distributed in various strategic locations. Technical Account Managers are responsible for pre-sales technical support and also the successful deployment of our product at the customer site. As of February 28, 2003, we employed 16 individuals in these organizations at NexPrise offices in Carlsbad, California and remote field locations. Expenses for marketing and sales were $5.5 million in 2002. Expenses for technical support and customer service in 2002 were approximately $414,000 and are included in cost of revenues. The 2001 and 2000 sales and marketing expenses included substantial expenses incurred prior to our revised business direction and our acquisitions of NexPrise and InfoPrise and are not indicative of planned future expenditures. We expect to add personnel and expenses only as needed to acquire and support new customers.

Research and Development

      Our research and development organization is focused on developing and enhancing our product for customers. As of February 28, 2003, our research and development organization included 22 employees responsible for software and system development. Expenses for research and development were $5.3 million in 2002, plus $399,000 of acquired in-process research and development related to the acquisition of InfoPrise. Research and development expenses in 2001 and 2000 were $24.6 million and $35.2 million, respectively. The research and development expense in 2001 included $2.3 million of acquired in-process research and development related to the acquisition of NexPrise. Both years included substantial expenses incurred prior to our revised business direction and to our acquisitions of NexPrise and InfoPrise and expenditures in those years are not indicative of planned future expenditures. To date, substantially all software development costs have been expensed as incurred because the time from working model to saleable model is very short. We believe that continued investments in research and development are required to remain competitive.

Product

      NexPrise’s product grew out of work that began in 1993. The product originally was developed as software technology to share sensitive documents securely over the Internet. In 1997, NexPrise was formed as a private company with intellectual property rights to this technology. We continued to develop the product and it evolved into the Program Manager and Quote System applications deployed in most of our installed base. In June 2002, we announced the release of the nProcess Platform and a set of configurable process

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      Our principal applications are Engineering Change Manager, Supplier Non-Conformance and Corrective Action Manager, Cost Estimation and Quote Manager, Contract Data Manager, Supplier Materials Manager, Action Item Manager and Management of Change. All NexPrise applications are collaborative business process software solutions that allow individuals within and between companies to work efficiently together. All applications have functionality for:

	•	Intelligent workflow and forms
	•	Role-based views
	•	Secure internal/external collaboration
	•	Powerful, flexible reporting
	•	Simple, efficient integration

      The nProcess Platform enables any number of process applications to be built rapidly, inexpensively and without writing code. The graphical workflow module, the ability to tailor access to data to the specific requirements of each participant in the process and the ability to create and map data objects enable our process experts to develop and configure business process automation applications that precisely fit customer processes, as well as to change those applications quickly and inexpensively as customers evolve their processes. We also license the nProcess Platform to customers who prefer to do their own development and modifications.

      System Architecture. Our solutions include two layers of technology:

	•	Infrastructure Layer. This layer is the foundation of the product and provides the product with Internet access, email and database functionality and security. The layer is implemented using standard web servers and supports standard Internet protocols such as HTTP/HTTPS and XML.
	•	Application Layer. This layer provides specific functionality and workflow for business applications such as Engineering Change Manager and Supplier Non-Conformance and Corrective Action Manager.

Competition

      The markets for business process automation and collaborative solutions are new and evolving rapidly. Competition is intense and is expected to increase significantly in the future. Barriers to entry are not substantial. We believe that the critical success factors for companies seeking to create these solutions include the following:

	•	Quality, reliability and security of the solution
	•	Breadth and depth of product offerings
	•	Ability of solution to embrace and extend installed legacy applications
	•	Ability of solution to be efficiently configured and rapidly deployed
	•	Brand recognition
	•	Installed base of customers
	•	Ease of use

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      We face competition from a diverse group of companies, including companies with Product Data Management (PDM) offerings such as MatrixOne or Parametric Technology Corporation (PTC). These companies have extended their PDM offerings to develop solutions that are competitive. Competition could also come from developers of enterprise software solutions such as i2 Technologies, Oracle, or Ariba, which may expand their product lines to compete. Competition could also come from enterprise application integration software providers, such as Vitria, BEA, and IBM. We believe we have a product that is superior to competitors’ offerings and that we can compete effectively with these companies. However, these companies have larger sales and marketing organizations and will be formidable competitors.

Proprietary Rights and Licensing

      Our success and ability to compete depends on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of copyright, trademark and trade secret laws and contractual restrictions to establish and protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. We have filed two U.S. patent applications and two foreign applications on our proprietary technology. One U.S. patent has been issued. Our remaining three patents are currently pending. We have registered two trademarks, have two applications pending and have filed petitions to revive two trademarks.

      Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Any resulting litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business operating results.

      Our business involves the licensing of our technology to our customers. Pursuant to our existing licenses, we have made certain representations and warranties and agreed to indemnify our licensees against claims of infringement by third parties. Thus, we may be exposed to a significant risk of liability for intellectual property infringement claims by others. Our success and ability to compete also depend on our ability to operate without infringing upon the proprietary rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results would be significantly harmed.

Employees

      As of February 28, 2003, we had 44 full-time employees, including 22 in research and development, 16 in sales and marketing and 6 in general and administrative functions. We also employ from time to time a limited number of independent contractors to support our development and administrative organizations.

Executive Officers of the Registrant

      Set forth below is information regarding the directors and executive officers of NexPrise as of February 28, 2003.

      Ted Drysdale has served as our President, Chief Executive Officer and Chairman of the Board of Directors since November 2001. Mr. Drysdale has served on our Board of Directors since October 2001. Prior to joining NexPrise, Mr. Drysdale was President and Chief Executive Officer of privately held NexPrise, Inc.,

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      Jerome E. Natoli has served as our Chief Financial Officer since March 2002. Mr. Natoli joined the Company as the Chemdex Director of Finance in March 2000 and was appointed Vice-President of Finance in March 2001. From October 1998 to March 2000 he was Controller of Hewlett-Packard’s E-Commerce division. Between July 1989 and October 1998 he held various positions in Hewlett-Packard’s finance organization in the U.S. and overseas. Mr. Natoli holds a B.A. in Economics from the University of California, Berkeley, and an M.B.A. from the University of Chicago.

      Raj Tolani was the President and Chief Executive Officer of InfoPrise, which was acquired by the Company in February 2002. Mr. Tolani has been in the software development industry for the past 17 years and is the former founder, Chairman and President of ObjectLogic. He led the development and growth of ObjectLogic, as well as its merger with Division Ltd and stayed on as Vice-President of Development after its acquisition. During his tenure with Division Ltd., he lead development teams in both the U.S. and U.K. Prior to that, as Vice-President of development for CV, he led the development of Perolus (CAD software) from its inception to completion. Mr. Tolani holds a Bachelor’s Degree in Mechanical Engineering from the Indian Institute of Technology and a Master’s Degree in Mechanical Engineering from the University of Rhode Island.

      John Lynch was appointed Senior Vice President of Sales & Services in August 2001. From July 2000 to August 2001 Mr. Lynch served as Senior Vice President of Sales at NexPrise, Inc. Prior to joining NexPrise, Mr. Lynch served from January 1999 to June 2000 as Area Vice President at Parametric Technology Corporation, where he was responsible for global account sales of web-based enterprise business-to-business collaboration software technology, document management, vaulting, and consulting services. Previous to PTC, Mr. Lynch served from May 1996 to December 1998 as Vice President Sales for Division Inc, where he was responsible for North American sales of web-based enterprise visualization tools to Fortune 1000 companies. Prior to Division, Mr. Lynch served as Vice President, Sales for the eastern region at Objectlogic, a developer of visualization and markup software. He holds a Bachelor of Science degree in Economics from the University of Southern California.

Item 2.     Properties

      Our executive, sales and development offices are located in approximately 10,107 square feet in Carlsbad, California under a lease expiring in December 2006. Administrative offices are located in approximately 1,200 square feet located in Palo Alto, California under a lease expiring in December 2003. We also have leased and sub-leased approximately 34,000 square feet in Palo Alto, California; both the lease and sublease expire on December 31, 2003. The Company also maintains small sales offices in a few domestic locations.

Item 3.     Legal Proceedings

      In March 2001, several lawsuits were filed in United States District Court for the Northern District of California against the Company and certain of its officers and directors on behalf of putative classes of persons who purchased the Company’s securities during time periods from December 13, 1999 through December 6, 2000. One of the lawsuits also names as a defendant the lead underwriter for the Company’s offering of convertible notes. The lawsuits generally allege that the Company and certain individuals violated federal securities laws by making false and misleading statements during 2000, including in the Company’s registration statement for its convertible notes offering. These lawsuits have been consolidated as In re Ventro Corp. Sec. Litig., Master File No. Civ. 01-1287 SBA, and a consolidated complaint was filed. Defendants have filed motions to dismiss. The Court has taken the motions under submission and will issue a ruling

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      In August 2001, Chadwell v Byers, Case No. CV800814, a putative stockholder derivative suit, was filed in California Superior Court, Santa Clara County against certain of the Company’s present and former officers and directors, alleging breaches of fiduciary duty and insider trading. The Company is named solely as a nominal defendant against which no recovery is sought. After a demurrer was sustained with leave to amend, the parties stipulated to a stay of proceedings pending resolution of the IN re Ventro Corp. Sec. Litig. Federal consolidated action.

      In March 2001, Kassin v. Ventro Corp. et al., Index No. 01-CV-3450 (SAS), a stockholder class action complaint, was filed in the United States District Court for the Southern District of New York against the Company, several of its officers and directors, and the underwriters of its initial public offering. The class action has been consolidated for pre-trial purposes with more than one thousand other actions, filed against more than 300 other issuers of securities, affiliated individuals and dozens of underwriters of the securities offerings in In Re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The plaintiffs allege that the prospectus for the initial public offering of the Company’s common stock, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose, among other things, that the underwriters had made secret arrangements for aftermarket purchases of the securities and made arrangements for excessive and improper underwriters’ compensation in the form of increased brokerage commissions. Plaintiffs are claiming damages of an unspecified amount based on the subsequent decline in the market price of the Company’s shares below their original offering price. The litigation is in an early phase, and no date has yet been set by the court for completion of pretrial discovery or trial. Although we believe that we have meritorious defenses to the action and intend to defend the suit vigorously, we cannot predict with certainty the outcome of this lawsuit. Our defense against such lawsuits will be costly and may require a significant commitment of time and resources by our senior management.

      The Company is a party to various claims in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

      None.

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PART II

Common Stock

      Our common stock is traded on the Nasdaq National Market under the symbol “NXPS”. The Company previously utilized the trading symbol “CMDX” from July 27, 1999 until February 28, 2000 and “VNTR” from March 1, 2000 until January 14, 2002. We have traded under the current symbol “NXPS” since January 15, 2002. Prior to July 27, 1999, there was no public market for our common stock. In April 2002, the Company effected a reverse split of its common stock. As a result of the reverse stock split, every 15 issued and outstanding shares of the Company’s old common stock were converted into one share of new common stock. The reverse split brought the minimum bid price per share of the Company’s common stock into compliance with the listing requirements of the Nasdaq National Market.

      The following table shows the high and low sale prices of the Company’s common stock as reported by the Nasdaq National Market for the periods indicated. The historical price per share data has been adjusted to reflect the reverse stock split.

Common Stock Price

      On January 31, 2003 there were approximately 405 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (or DTC). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede and Co. as one stockholder.

Dividend Policy

      We have not declared or paid any cash dividends on our capital stock since our inception and do not expect to pay any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business.

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      The selected financial data below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included in this document. The following balance sheet data as of December 31, 2002 and 2001 and the selected consolidated statements of operations data for years ended December 31, 2002, 2001, and 2000 have been derived from audited consolidated financial statements included elsewhere in this document. The consolidated balance sheet data as of December 31, 2000, 1999, and 1998 and the consolidated statements of operation data for the years ended December 31, 1999 and 1998 have been derived from audited consolidated statements not included in this document. The selected consolidated statement of operations data has been restated to reflect the Chemdex and Promedix businesses as discontinued operations. Historical results are not necessarily indicative of results that may be expected for future periods. See Note 2 of Notes to our Consolidated Financial Statements that explains how shares used in computing basic and diluted net loss per share were determined.

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      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those stated herein. Although management of NexPrise believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, performance, or achievements. For further information, refer to the Risk Factors section of this Form 10-K.

Overview

      We are a seller of business process applications and collaborative solutions for program management and quote management. Our revenue primarily consists of subscriptions of bundled license, post contract support (PCS) and, in most cases, hosting services.

      In 2001, we significantly restructured our operations and focused on a new business direction. We exited the business of building and servicing business-to-business marketplaces and entered the business of providing collaborative and business process automation software solutions. In August 2001, while doing business under the name Ventro Corporation, we acquired privately-held NexPrise, Inc., a company with an advanced collaborative software solution and an established customer base located in Santa Clara, California. Later in the year we reorganized our management team and Board of Directors and took measures to reduce commitments and operating expenses and conserve cash. In 2001, the Company incurred a net charge of $16.5 million in connection with restructurings and settlements. In January 2002, we changed our name to NexPrise, Inc.

      On February 4, 2002, we acquired privately-held InfoPrise, a provider of data management solutions located in Carlsbad, California. As consideration for the acquisition, we issued to InfoPrise’s stockholders an aggregate of 139,790 shares of NexPrise common stock together with unsecured 6% promissory notes convertible into the Company’s common stock, due in 2007, with a face value of $3,040,000 and a per share conversion price of $18.75. We also assumed InfoPrise’s outstanding stock options, which may result in the issuance of up to approximately 64,000 shares of common stock if all of the assumed options are exercised. As of December 31, 2002 1,820 of these options had been exercised. All operating results presented for periods following the above date are derived from the combined operations of NexPrise and InfoPrise. We expect to incur operating losses on a quarterly basis for at least the next 12 months as we develop and enhance our technology and service offerings.

Critical Accounting Policies

      Use of Estimates. Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements

      Revenue Recognition. Revenue is made up primarily of subscriptions of bundled license, post contract support (PCS) and, in most cases, includes hosting services. The Company recognizes such revenue using the “subscription” method, whereby the initial and renewal amounts are recognized ratably over the period of the

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      Consolidations. The various interests that we have acquired in companies are accounted for under three broad methods: consolidation, the equity method and the cost method. The applicable accounting method is generally determined based on our voting interest in a company.

      Companies that NexPrise directly or indirectly control are accounted for under the consolidation method of accounting. Under this method, a company’s accounts are reflected within its Consolidated Financial Statements. All significant inter-company accounts and transactions are eliminated.

      Entities where NexPrise can exercise significant influence, but not control, are accounted for under the equity method of accounting. Whether or not NexPrise exercises significant influence with respect to a company depends on an evaluation of several factors including, among others, representation on the company’s board of directors and ownership level, generally 20% to 50% interest in the voting securities of the company including voting rights associated with NexPrise holdings in common, preferred and other convertible instruments in the company. Under the equity method of accounting, our share of the earnings or losses of these companies are included in the equity income (loss) section of the Consolidated Statements of Operations.

      Companies not consolidated or accounted for under the equity method are accounted for under the cost method of accounting. Under this method, NexPrise’s share of the earnings or losses of these companies is not included in its Consolidated Statements of Operations. The Company periodically evaluates the carrying value of its investments for impairment.

      The fair value of the remaining long-term investment is dependent on the performance of the entity in which the Company has invested, as well as volatility inherent in the external markets for this investment. In assessing potential impairment for this investment the Company will consider these factors as well as forecasted financial performance of its investee. If these forecasts are not met the Company may have to record additional impairment charges not previously recognized.

      Long Lived Assets. The Company reviews property, plant and equipment, goodwill and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. During 2003 we will continue to evaluate our intangible assets for impairment as events and circumstances warrant. Among other circumstances, a material deterioration in the future cash flows expected from these assets due to lower than planned revenue or a decline in the Company’s market capitalization could be indicators of impairment and lead to write-offs.

      Legal. The Company is involved in certain claims and litigation related to its operations, including ordinary, routine litigation incidental to its business. Management reviews and determines which liabilities, if any, arising from these claims and litigation could have a material adverse effect on the Company’s consolidated financial position, liquidity, results of operations or properties. In reviewing these claims and litigation, management assesses the likelihood of any adverse judgments or outcomes to these matters as well

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Results of Operations

      The following table sets forth items from our consolidated statement of operations (in thousands):

      Revenues. NexPrise reported approximately $2.8 million of revenue for the year ended December 31, 2002, an increase of $1.8 million from the approximately $1.0 million reported in 2001. This revenue is made up primarily of subscriptions and maintenance for the Company’s collaborative commerce products generated subsequent to our August 8, 2001 acquisition of privately-held NexPrise, Inc. Subscription revenue entails recognizing the value of the customer contract as revenue ratably over the term of the contract. Previously, revenues were derived primarily from product sales through the Chemdex and Promedix marketplaces, which have been presented as discontinued operations.

      Cost of Revenues. Cost of revenues were approximately $2.4 million in 2002, up $1.6 million from the approximately $797,000 recorded in 2001. Cost of revenues consist primarily of outsourced hosting services for our customers, amortization of the intangible technology asset acquired as part of our acquisition of NexPrise

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      Research and Development. Research and development (“R&D”) expenses consist primarily of personnel and other expenses associated with developing, updating, and enhancing software. R&D expenses from continuing operations were approximately $5.3 million during 2002, down approximately $19.3 million from 2001. R&D expenses in 2001 were $24.6 million, down $10.6 million from 2000. The decreases were largely driven by reductions in workforce that have occurred over the past 24 months. To date, all software development costs have been expensed in the period incurred. A substantial portion of research and development expenses incurred in 2000 related to operations that are included in the discontinued operations line items. The Company does not expect R&D expenses to change significantly in the coming year. We believe that continued investments in research and development are required to remain competitive.

      In Process Research and Development. The Company expensed $399,000 and $2.3 million of acquired in-process research and development for the year ended December 31, 2002 and December 31, 2001, respectively. The in-process research and development expensed in 2002 was acquired as a result of the InfoPrise acquisition in February 2002. The in-process research and development expensed in 2001 was acquired as a result of the NexPrise acquisition in August 2001. The Company determined the amounts of in process research and development through independent valuations in connection with the allocation of purchase price.

      Sales and Marketing. Sales and marketing expenses consist primarily of payroll and related expenses for personnel engaged in enterprise sales activities and enterprise account management, as well as travel and promotional expenses. Sales and marketing expenses from continuing operations were approximately $5.5 million during 2002, down approximately $5.6 million from 2001. Sales and marketing expenses in 2001 were $11.1 million, down $13.4 million from the approximately $24.5 million expensed during 2000. The decrease was driven by reductions in workforce that took place during 2002 and 2001 and reduced spending on marketing programs. Sales and marketing expenses in 2000 related to operations that were discontinued in December 2000 are included in discontinued operations. The Company expects sales and marketing expenses in the coming year to increase as investments are made in personnel and programs to acquire new customers.

      General and Administrative. General and administrative expenses consist primarily of salaries, fees for professional services and facilities expenses. General and administrative expenses from continuing operations were approximately $5.1 million, down approximately $9.0 million from 2001. General and administrative expenses from continuing operations in 2001 were approximately $14.1 million, an increase of approximately $7.4 million from the approximately $6.7 million spent in 2000. The decrease in 2002 was driven by reductions in infrastructure costs and reductions in workforce. The increase in 2001 was driven by incentive payments made in the first two quarters of 2001 and reduced cost recoveries from subsidiaries and marketplace investments. The Company does not expect general and administrative expenses to change significantly in the coming year.

      Settlements, Restructurings and Other. The Company did not report any restructuring or settlement expenses in the year ended December 31, 2002. During the year ended December 31, 2001, the Company reported charges of approximately $16.5 million for several actions taken to improve efficiencies and reduce operating costs. The specific actions include employee and contractor terminations, consolidation of facilities, settlements of various disputes and termination of leases. The net of these charges was reported as a component of loss before extraordinary item and consisted of approximately $5.4 million of expense related to workforce reductions, approximately $7.2 million of expense related to terminating equipment and property leases and asset write-offs of approximately $11.6 million. These expenses were partially offset by an approximately $7.6 million net gain from settlements with our former marketplace companies. At Decem-

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      During the year ended December 31, 2000, the Company recorded approximately $4.9 million of restructuring charges. The charge included $320,000 and $990,000 of cash and non-cash charges, respectively, related to employee layoffs in addition to approximately $3.3 million of non-cash charges for the write-off of intangible assets associated with development projects that were cancelled and $280,000 for other expenses. Substantially all of the cash charges related to the restructuring were paid in the fourth quarter of 2000.

      Impairment of Goodwill. SFAS 142, Goodwill and Other Intangible Assets, requires that we evaluate on an annual basis (or whenever events occur which may indicate possible impairment) whether any portion of our recorded goodwill is impaired. This analysis requires management to make a series of critical assumptions to: (1) evaluate whether any impairment exists, and (2) measure the amount of impairment. The Company performed the required transitional impairment test and annual impairment test of the goodwill acquired as part of its acquisition of NexPrise as of January 1, 2002 and September 30, 2002, respectively, and, in each case, did not identify an impairment of the goodwill balance. In the fourth quarter of 2002 our market capitalization decreased to a value at December 31, 2002 that was approximately $14 million less than our book value prior to any impairment charges. That decrease and a reduction in forecast revenues led us to conclude there were sufficient indicators to warrant an evaluation of whether any portion of our $11.7 million of recorded goodwill was impaired in the fourth quarter of 2002. The analysis resulted in an impairment charge equal to the entire $11.7 million balance in the fourth quarter of 2002. The remaining identified intangible assets were also tested for impairment. No impairment was found, as the value of the undiscounted cash flows expected to be generated by these assets over their estimated lives exceeded their carrying value of $9.2 million at December 31, 2002. During 2003, we will continue to evaluate these intangible assets for impairment as events and circumstances warrant. If an impairment is determined, further write-offs may be required.

      Interest Expense. Interest expense in 2002 was approximately $749,000, down approximately $4.9 million from 2001. Interest expense in 2001 was approximately $5.6 million, down approximately $7.2 million from the $12.8 million expensed in 2000. Interest expense consists primarily of interest related to convertible subordinated notes issued in April 2000, the convertible promissory note issued in association with the purchase of InfoPrise in February 2002 and, to a lesser extent, financed equipment and other financing arrangements. With respect to the subordinated notes, approximately $265,000 is payable semi-annually in arrears on April 1 and October 1 of each year for interest on the notes that remain outstanding at December 31, 2002. In addition, the remaining deferred offering costs of approximately $198,000 related to the subordinated notes are being amortized as interest expense ratably over the term of the subordinated notes. With respect to the InfoPrise convertible promissory note, approximately $73,000 is payable annually on each anniversary of the issuance of the promissory note, with the balance of interest owed due at maturity. The decrease in interest expense in 2002 and 2001 was due primarily to the retirement of approximately 96% of the original balance of convertible subordinated notes during 2001.

      Interest Income and Other, Net. Interest income and other, net, in 2002 was approximately $216,000 in 2002, a decrease of approximately $4.2 million from 2001. Interest income and other, net, in 2001 was approximately $4.4 million, a decrease of approximately $9.8 million from the $14.2 million reported in 2000. Interest income and other, net, has been derived primarily from earnings on investments in cash equivalents and short-term investments. The decrease in interest income and other is primarily attributable to lower cash, cash equivalent and investment balances and a decline in interest rates during 2002. Interest income in 2003 is expected to be somewhat lower as a result of lower cash equivalents and short-term investments balances.

      Investment Losses. The 2002 investment loss of approximately $1.4 million is approximately $8.4 million lower than the loss reported in 2001. The $9.8 million loss reported for 2001 is $13.9 million lower than the $23.7 million reported in 2000. The loss in 2002 is made up primarily of approximately $3.0 million of equity losses in the marketplace companies in which we have a significant ownership percentage and approximately $186,000 of write-downs for impairment deemed to be other than temporary of an investment accounted for using the cost method, offset by an approximately $1.8 million gain from the sale of the

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      Loss from Continuing Operations. As a result of the changes described above, the loss from continuing operations was approximately $29.4 million in 2002, down $49.9 from 2001. The loss from continuing operations was approximately $79.3 million in 2001, a decrease of $14.2 from 2000. The loss from continuing operations is expected to decrease in 2003 due to reductions we have made in operating expenses and the planned increase in revenue.

      Discontinued Operations. In December 2000, the Company’s Board of Directors adopted a formal plan for and announced the shut down of all business operations associated with the Company’s life sciences and specialty medical products marketplaces. The shutdown of Chemdex, Promedix and SpecialtyMD was completed by March 31, 2001.

      The businesses represented by Promedix and Specialty MD were acquired in the first quarter of 2000. These transactions were accounted for in accordance with the purchase method of accounting. For Promedix, the purchase consideration was shares of the Company’s common stock valued at $325.3 million. The entire Promedix purchase price was allocated to intangible assets. For SpecialtyMD, the purchase consideration was shares of the Company’s common stock valued at $107.7 million. Of the SpecialtyMD purchase price, $0.8 million was allocated to net tangible liabilities and the remainder to intangible assets. The Company wrote off as part of the loss on disposal of discontinued operations $326.7 million of intangible assets.

      No interest expense was allocated to discontinued operations. In addition, general corporate overhead has been allocated to continuing operations for all periods presented prior to fiscal 2001.

      Revenues from discontinued operations were approximately $24.2 million and $99.3 million for the years ended December 31, 2001 and 2000, respectively. The Company paid approximately $9.8 million in 2001 for severance, lease obligations and other liabilities incurred to shut down Chemdex and Promedix. At December 31, 2002 accrued liabilities relating to discontinued operations amounted to approximately $336,000.

      Extraordinary Gain. During 2001, the Company repurchased approximately $241.2 million of convertible subordinated notes, which represented approximately 96.5% of the notes outstanding at December 2000. The total consideration provided by the Company for the tendered notes, including accrued interest, transaction and other costs, was approximately $81.4 million. The Company recognized a gain of approximately $159.8 million on the transactions.

Liquidity and Capital Resources

      As of December 31, 2002, NexPrise had approximately $10.3 million of cash, cash equivalents and short-term investments; working capital was approximately $8.1 million.

      Net cash used in operating activities was approximately $14.8 million for the year ended December 31, 2002 compared to $77.5 million of net cash used in operating activities for the year ended December 31, 2001. Net cash used in operating activities for the year ended December 31, 2002 is primarily attributable to the net loss for the period (less non-cash expenses) and, to a lesser extent, an increase in deferred revenue and decreases in accounts payable, accrued compensation, accrued expenses and discontinued liabilities. Non cash items primarily consisted of an impairment of goodwill which totaled $11.7 million, depreciation and amortization of $4.4 million and investment losses of $3.2 million. These cash flows used in operating activities were partially offset by decreases in accounts receivable, other current assets and discontinued assets and gains of approximately $1.8 million from the sale of Amphire Solutions. The actions taken in the past 12 months to

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      Net cash provided by investing activities totaled $4.5 million for the year ended December 31, 2002, compared to net cash provided by investing activities of $61.2 million for the year ended December 31, 2001. During the year ended December 31, 2002, the Company had net sales and maturities of approximately $2.9 million of short-term investments and received cash of approximately $1.0 million as part of the acquisition of InfoPrise.

      Net cash used in financing activities was $112,000 for the year ended December 31, 2002 compared to net cash used in financing activities of $61.5 million for the year ended December 31, 2001. Net cash used in financing activities for the year ended December 31, 2002 resulted primarily from the principal payments on our capital lease obligations. This lease has been paid in full. In addition, the Company used $26,000 in the year ended December 31, 2002 to repurchase Company stock.

      Management believes the Company has adequate cash to sustain operations at least through 2003 and is managing its business to achieve positive cash flow utilizing existing assets. During 2002 the Company continued to reduce ongoing operating expenses by renegotiating its lease commitments, reducing purchases of other services and making workforce reductions. It is management’s belief that the adjustments to spending that have been made, combined with receipts expected from customer contracts already in place and new customer contracts expected to be signed in 2003 and thereafter will provide the additional resources required to achieve positive cash flow. We are committed to the successful execution of our operating plan and will take further action as necessary to align our operations and reduce expenses.

      Although we expect our existing cash, cash equivalent and investment balances together with our anticipated cash flows from operations to be sufficient to meet our working capital and operating resource expenditure requirements for at least the next 12 months, higher than anticipated expenses or lower than anticipated receipts may result in lower cash, cash equivalents and investments balances than presently anticipated and we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.

Contractual Obligations

      The following table summarizes the company’s contractual obligations and commercial commitments as of December 31, 2002 (in thousands):

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 after June 30, 2001. SFAS No. 141 also specifies criteria for determining intangible assets acquired in a purchase method business combination that must be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for

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      In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and portions of Accounting Principles Board Opinion 30, Reporting the Results of Operations. This standard provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This standard also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. Our adoption of SFAS 144 on January 1, 2002 did not have a material effect on our operating results or financial condition.

      In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses significant issues relating to the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that the initial liability for costs associated with exit and disposal activities be measured at fair value and prohibits the recognition of a liability based solely on an entity’s commitment to a plan. The provisions of SFAS 146 are effective for exit and disposal activities initiated after December 31, 2002. Retroactive application of SFAS 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of SFAS 146 should continue to be accounted for in accordance with EITF 94-3 or other applicable pre-existing guidance. The Company does not believe that the adoption of SFAS 146 will have a material impact on its financial position or results of operations.

      In December 2002, the FASB issued SFAS 148, Accounting for Stock Based Compensation — Transition and Disclosure — an Amendment of SFAS 123. SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS 123, Accounting for Stock Based Compensation. Furthermore, SFAS 148 mandates new disclosures in both interim and year-end financial statements within the Company’s Significant Accounting Policies footnote. The Company has adopted these disclosure requirements for the year ended December 31, 2002 and will apply them to its interim financial statements beginning in 2003.

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      In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a rollforward of the entity’s product warranty liabilities. NexPrise will apply the recognition provisions of FIN 45 prospectively to guarantees issued after December 31, 2002. The disclosure provisions of FIN 45 are effective for financial statements for the first quarter of NexPrise’s fiscal year 2003. NexPrise is currently in the process of evaluating the potential impact that the adoption of FIN 45 will have on its consolidated financial position and results of operations.

      In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. NexPrise is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.

Risk Factors

      This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following cautionary statements and elsewhere in this Annual Report on Form 10-K. If any of the following risks were to occur, our business, financial condition or results or operations would likely suffer. In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating NexPrise and its business because such factors may have significant impact on NexPrise’s business, operating results and financial condition.

Investment Considerations

      An investment in our securities involves significant risks, including those described below. These risks relate to our ability to generate revenues and gain operating efficiencies, our history of losses, significant changes, our ability to hire and retain key personnel, our reliance on the hosted environment and technology provided by others, the possible delisting of our common stock, the need to respond to rapid technological change and legal claims against us.

      Our actual results may differ materially from those expressed in any forward-looking statement as a result of certain factors, including but not limited to those set forth below and included in other portions of this document.

We Have a Limited Operating History and an Evolving Technology and Service Offering, Which Makes it Difficult to Evaluate Our Future Prospects

      Our success is based on integrating and developing a viable technology and services offering and securing new customers. Our business model is not fully developed, not proven and depends upon our ability, among other things, to:

	•	develop and market technology and services solutions that achieve broad market acceptance by our customers;
	•	acquire and deploy a sufficient number of customers to achieve profitability;
	•	extend our technology to support a large range of customers with a variety of needs;
	•	acquire or license third party technologies that we require to deliver our technology and services;
	•	overcome publicity related to our public announcements of restructurings, litigation and the shutdown of our former marketplaces;

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	•	overcome customer bias toward choosing larger, well capitalized vendors to provide their enterprises software solutions; and
	•	acquire customers operating in industries where we have limited experience and provide them quality technology and services.

      We may not successfully address these risks. If we do successfully address these risks, additional risks related to factors that are outside our control may prevent us from realizing sufficient revenues or profit margins to reach or sustain profitability. For example, collaborative business process solutions may experience problems with users as a result of security and privacy concerns or general reticence about technology.

We May Not Achieve the Benefits We Expected from the Acquisitions of NexPrise and of InfoPrise and This May Have a Material Adverse Effect on the Combined Company’s Business, Financial Condition and Operating Results

      The combined company will need to overcome significant issues in order to realize expected benefits or synergies from the acquisitions of NexPrise and InfoPrise, including the timely, efficient and successful execution of a number of post-merger events. Key events include:

	•	developing a product that will be attractive to existing and potential customers; and
	•	retaining existing customers and strategic partners of each company.

      The successful execution of these post-merger events will involve considerable risk and may not be successful. These risks include:

	•	the potential disruption of the combined company’s ongoing business and distraction of its management;
	•	the difficulty of incorporating acquired technology and rights into the combined company’s products and services;
	•	unanticipated expenses related to technology integration;
	•	potential unknown liabilities associated with the merger.

      The combined company may not succeed in addressing these risks or other problems encountered in connection with the mergers.

We Are Dependent on a Small Number of Customers in a Limited Number of Industries

      To date, we have derived a significant portion of our revenues from a small number of customers in two industries. Many of our customers do not have contracts that extend beyond one year. Critical to the success of the Company’s business plan will be the acquisition of new customers in other industries, increasing the number of users in our current customers and renewing current contracts. There can be no assurance that we will be successful in developing profitable relationships with new customers in new industries or that we will retain existing customers.

Legislative Actions, Higher Insurance Costs and Potential New Accounting Pronouncements May Cause our General and Administrative Expenses to Increase and Impact our Future Financial Position and Results of Operations

      In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq and proposed accounting changes by the Securities and Exchange Commission, we may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which will cause our general and administrative costs to increase beyond what we currently have planned. Insurers are also likely to increase premiums as a result of the high claims rates incurred over the past year, and so our premiums for our various insurance policies, including our directors’ and officers’ insurance policies, are likely to increase. Proposed changes to accounting rules, including proposals to account

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Security Risks and Concerns May Decrease the Demand for Our Services, and Security Breaches May Disrupt Our Services or Make Them Inaccessible to Our Customers.

      Our services include the storage and transmission of business-critical, proprietary information. If the security measures we or our third party data centers have implemented are breached, our customers could lose this information and we could be exposed to litigation and possible liability. Anyone who circumvents these security measures could misappropriate business-critical proprietary information or cause interruptions in our services or operations. In addition, computer “hackers” could introduce computer viruses into our systems or those of our customers, which could disrupt our services or make them inaccessible to customers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. Our security measures and those that our third-party data centers provide may be inadequate to prevent security breaches, and our business and reputation will suffer if these breaches occur.

We Are Dependent Upon Outsourcing Providers for Provision of the Hosted Environment for our Customers; Connection and Performance Issues Have Occurred and May Recur

      We rely on third-party providers for our data center services, principal Internet connections and data hosting. This hosted environment is critical to the provision of our software to many of our customers and if the environment does not work well, is cut-off or fails, our customers would be unable to use our solution. We have experienced and may continue to experience interruptions and delays in service and availability for such services. We have signed an agreement with a new vendor to provide the hosted environment, but there can be no assurance that the transition to a new provider will successfully occur to the full satisfaction of our customers. Furthermore, we rely on these third party providers to respond promptly to requests we make for changes to our hardware, networking and telecommunications configuration in order to deliver our products and services to our customers. Any failures, security breaches, interruptions, or delays experienced or caused by these third party providers could negatively impact our relationship with users and adversely affect our brand and our business and could expose us to liabilities to third parties.

      Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event at our company or any third party provider. Our and their operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. In addition, the majority of our and their network infrastructure is located in California, an area susceptible to earthquakes. In the recent past, the western United States (and California in particular) has experienced repeated episodes of diminished electrical power supply. As a result of these episodes, certain of our and their operations or facilities may be subject to “rolling blackouts” or other unscheduled interruptions of electrical power. The prospect of such unscheduled interruptions may continue for the foreseeable future and we are unable to predict either their occurrence, duration or cessation. We do not have, and our third party providers may not have, multiple site capacity for all of our services in the event of any such occurrence. Despite implementation of network security measures, the servers are vulnerable to computer viruses, physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems. In addition, systems are vulnerable to coordinated attempts to overload them with data, which could result in denial or reduction of service to some or all of our users for a period of time. Furthermore, the failure by the third party providers to provide our required data communications capacity could result in interruptions in our service. Interruptions in our service will reduce our revenues and profits, and our future revenues and profits will be harmed if our users believe that our system is unreliable or insecure. We have experienced system failures from time to time. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We do not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any of these events. Any such event could have a material adverse effect on our business, operating results, and financial condition.

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Our Operating Results Are Highly Dependent on License and Service Revenues from Our Software Suite and Our Business Could Be Materially Harmed by Factors That Adversely Affect the Pricing and Demand for This Software Suite

      Substantially all of our revenues to date have been derived from the sale of licenses and services associated with the ipTeam^TM solution. Our future operating results will depend on continued demand for ipTeam and the recently introduced nProcess Platform. ipTeam was commercially launched in 1998. If our competitors release new products that are superior to ipTeam or nProcess Platform in performance or price, or if we fail to enhance ipTeam and nProcess Platform in a timely manner, demand for our products may decline, and we may have to reduce the pricing of our products. A decline in demand or pricing as a result of these or other factors would significantly reduce the revenues we can expect in the future.

      In the past, many software companies have experienced delays in the commencement of commercial release of their products. To date, such delays have not had a material impact on NexPrise’s revenues. In the future, we may fail to introduce or deliver new products on a timely basis. If new releases or products are delayed or do not achieve market acceptance, we could experience customer dissatisfaction or a delay or loss of revenues. In addition, customers may delay purchases of our products in anticipation of future releases. If customers defer material orders in anticipation of new releases or new product introductions, our revenues may decline.

      Moreover, as we release enhanced versions of our products, we may not be successful in upgrading our customers who purchased previous versions of the product to the current version. We also may not be successful in selling add-on modules for our products to existing customers. Any failure to continue to upgrade existing customers’ products or sell new modules, if and when they are introduced, could negatively impact customer satisfaction and our revenues.

      As with most software companies, developing and selling a product that does not require significant customization in product features or sales process for any particular customer or set of customers is critical to our success. If we are unable to resist customer requests to individualize our product or unable to develop a repeatable sales process our revenues will suffer and our costs will increase.

The Company Has a History of Losses, No Significant Revenues and Expects to Continue to Incur Significant Operating Losses and Negative Cash Flow; We May Never Achieve or Maintain Profitability

      We have incurred substantial net losses in the past and we expect to incur net losses in future periods. We incurred a net loss of approximately $29.4 million during the year ended December 31, 2002 and a net loss before extraordinary items of $79.3 million during the year ended December 31, 2001. As of December 31, 2002 we had an accumulated deficit of approximately $625 million. We will need to generate significant increases in revenues to achieve and maintain profitability, and we may not be able to do so. If our revenues grow more slowly than we anticipate or if our operating expenses cannot be reduced in the event of lower than expected revenues, we may find it necessary to obtain additional equity or debt financing or, in the alternative, significantly curtail our operations. Such financing may not be available on acceptable terms or at all. Even if we achieve profitability in the future on a quarterly or annual basis, we may not be able to sustain or increase profitability. Failure to achieve profitability or achieve and sustain the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.

We Operate in a New, Highly Competitive Market and Our Inability to Compete Successfully Against New Entrants and Established Companies Could Adversely Affect Our Market Share

      Our target market is rapidly evolving and is highly competitive. It may be characterized by an increasing number of market entrants, as many companies may find a technological path around existing barriers to entry.

      We already have competition from a diverse group of companies, including companies such as MatrixOne and PTC. In addition, providers of various software products such as Ariba, Commerce One, Oracle, IBM and SAP may expand their product offerings to be competitive with us in the future.

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      Our current and potential competitors may develop superior platforms that achieve greater market acceptance than our solution. Many of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Such competitors can undertake more extensive marketing campaigns for their brands, products and services, adopt more aggressive pricing policies and make more attractive offers to customers, potential employees, distribution partners, commerce companies and third-party suppliers.

      In addition, substantially all of our prospective customers have established and long-standing relationships with some of our current or potential competitors. Accordingly, we cannot be certain that we will be able to expand NexPrise’s customer and user base, or retain its current customers. We may not be able to compete successfully against our current or future competitors, which could have a material adverse effect on our business, results of operations and financial condition.

Our Financial Performance and Workforce Reductions May Adversely Affect the Morale and Performance of Our Personnel and Our Ability to Hire New Personnel

      In connection with the evolution of our business model and in order to reduce our cash expenses, we have enacted a number of changes in personnel. This includes changes to virtually all executive management, resignation of most of the original board of directors, significant workforce reductions and transfers of several employees. The significant changes in personnel may adversely affect morale and the Company’s ability to attract and retain key personnel. In addition, recent trading levels of our common stock have decreased the value of the stock options granted to employees pursuant to our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies they perceive to have better prospects.

General Economic and Political Conditions May Impact Our Results

      Our revenue growth and future profitability depend on the overall demand for software and related services. This demand can be adversely affected by unfavorable economic conditions, as customers reduce or defer spending on information technology improvements. We may be especially prone to this as a result of the relatively small installed base and operating history of our products. A softening demand for software caused by a prolonged slowdown of the economy would result in decreased revenue or lower revenue growth rates and would adversely affect our operating results.

      Recent political events, including the prospect of U.S. military action in the Middle East and elsewhere, have put further pressure on economic conditions. The potential turmoil that may result from such events contributes to the uncertainty of the economic climate, further reducing predictability and our ability to develop and implement long-term strategic plans. The impact of these or future similar events may have a material adverse impact on our operating results and financial position

If We Fail to Comply with Nasdaq Rules, Our Common Stock May Be Delisted from Nasdaq, Which Could Eliminate the Trading Market for Our Common Stock

      If we fail to meet the criteria for continued listing on Nasdaq, our common stock may be delisted from Nasdaq. The Nasdaq National and SmallCap Markets have a number of criteria companies are required to meet in order to stay listed on Nasdaq. Those criteria include maintaining a minimum bid price of at least $1 per share and maintaining stockholder’s equity of at least $10 million for the Nasdaq National Market or $2.5 million for the Nasdaq SmallCap Market. If NexPrise is unable to maintain the $1 per share minimum bid price or if ongoing reported losses drive stockholder’s equity below the $2.5 million threshold, the Company may be delisted from Nasdaq. If the stock is delisted, it would significantly decrease the liquidity of an investment in NexPrise common stock. In addition, following delisting, the stock could be deemed to be penny stock. If our common stock is considered penny stock, it would be subject to rules that impose additional sales practices on broker-dealers who sell our securities. For example, broker-dealers would have to make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared prior to any transaction involving a

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The Market Price Per Share of NexPrise Common Stock Following the Reverse Stock Split May Not Remain in Excess of the $1.00 Minimum Bid Price as Required by Nasdaq, as Downward Pressure May be Created by Such Split or Other Factors May Arise.

      We cannot predict whether the reverse stock split completed in 2002 will permanently increase the market price for our common stock. The history of similar stock split combinations for companies in like circumstances is varied. There is no assurance that the market price per share of our common stock following the reverse stock split will remain in excess of the $1.00 minimum bid price as required by Nasdaq or that we will otherwise meet the requirements of Nasdaq for continued inclusion for trading on Nasdaq. A reverse stock split could negatively impact the value of our stock by allowing additional downward pressure on the stock price as its relative value becomes greater following the reverse split. In other words, the stock, at its new, higher price, has farther to fall and therefore more room for investors to short or otherwise trade the value of the stock downward. Similarly, a delisting may negatively impact the value of the stock as stocks trading on the over-the-counter market are typically less liquid and trade with larger variations between the bid and ask price. The market price of our common stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding. If the market price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a reverse stock split. Furthermore, liquidity of our common stock could be adversely affected by the reduced number of shares that would be outstanding after the reverse stock split.

Our Business Involves a Lengthy and Unpredictable Sales Cycle

      The sales cycle for the target customers for the software and services we provide tends to be lengthy and our sales cycle may be somewhat longer than those of our more established competitors. The unpredictability of the length of our sales cycle could make it difficult to forecast revenue and plan expenditures. Additionally, any delays in deployment of our software related to our inexperience with a type of business or the size or complexity of the account would delay our ability to recognize revenue from that account. Such delays could adversely affect our financial results.

      The market for software and services is characterized by rapid technological change, frequent new hardware, software and networking product introductions and Internet-related technology enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. If we do not develop technology that can respond to these changes the probability of us obtaining new customers will be remote. In particular, we are designing our technology to support a variety of hardware, software and networking products that we believe to be proven and among the most widely used. We can make no assurances, however, that future customers will continue to use these products. Even if they do, new versions of these products are likely to be released and we will need to adapt our technology to keep pace with changes made to hardware and software configurations and network infrastructures.

      If we do not develop, license or acquire new technology, or deliver enhancements to existing products on a timely and cost-effective basis, we may be unable to meet the growing demands of potential customers. In addition, as we introduce new services or technologies into existing customer architectures, we may experience performance problems associated with incompatibility among different versions of hardware, software and

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      Despite testing by us, our partners and our customers, errors may be found in our products after commencement of commercial delivery. Errors have arisen in our software products from time to time, and they could arise again in the future. If errors are discovered, we may not be able to successfully correct them in a timely manner or at all. Errors and failures in our products could result in loss of or delay in market acceptance of our products and damage to our reputation and our ability to convince commercial users of the benefits of our products. In addition, we may need to make significant expenditures of capital resources in order to eliminate errors and failures. Since our products are used by customers for mission-critical applications, errors, defects or other performance problems could also result in financial or other damages to our customers, which could assert warranty and other claims for substantial damages against us. Although our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that such provisions may not be effective or enforceable under the laws of certain jurisdictions. In addition, our insurance policies may not adequately limit our exposure with respect to such claims. A product liability claim, even if unsuccessful, would be costly and time-consuming to defend and could harm our business.

      Important factors that could cause our quarterly results to fluctuate materially include:

	•	the timing of obtaining new customers (length of sales cycle);
	•	the timing of deploying services for new customers;
	•	the timing and magnitude of operating expenses and capital expenditures;
	•	costs related to the various third-party technologies we incorporate into our products;
	•	utilization of third party data center services and technology infrastructure;
	•	changes in our pricing policies or those of our competitors; and
	•	the amount of credits that we may be required to issue to our current customers if we fail to deliver our services pursuant to contractual arrangements.

      Due to these and other factors, quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for any one quarter as an indication of our future performance. In future quarters, our operating results may fall below the expectations of public market analysts or investors. If this occurs, the market price of our common stock would likely decline.

      Our current and future levels of operating expenses and capital expenditures are based largely on our operating plans and estimates of future billings and revenues. These expenditure levels are, to a large extent, fixed in the short term. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenue relative to planned expenditures could negatively impact our business and results of operations.

      Our success and ability to compete depends on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of copyright, trademark and trade secret laws and contractual restrictions to establish and protect the proprietary aspects of our technology. We seek to protect the source code for our software, documentation and other written materials under trade secret copyright laws. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to

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      Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Any resulting litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business operating results.

      Our business has involved the licensing of our technology to our customers. Pursuant to our existing licenses, we have made certain representations and warranties and agreed to indemnify our licensees against claims of infringement by third parties. Thus, we may be exposed to a significant risk of liability for intellectual property infringement claims by others. Our success and ability to compete also depend on our ability to operate without infringing upon the proprietary rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results would be significantly harmed.

      As part of our normal operations, we purchase or license software products from third party commercial vendors. These products may not continue to be available on commercially reasonable terms, or at all. The loss of these products could result in delays in the sale of our services until equivalent technology, if available, is identified, procured and integrated, and these delays could result in lost revenues. Some of the key components of our services are available only from sole or limited sources. Further, to the extent that the vendors from whom we purchase these products increase their prices, our gross margins could be negatively affected.

      In addition to regulations applicable to businesses generally, in connection with our former business of servicing business-to-business marketplaces, we were subject to direct regulation by governmental agencies which includes numerous laws and regulations generally applicable to the chemical, pharmaceutical, controlled substances, human and biological reagents, medical and invitro devices, nuclear chemical businesses and environmental spills, as well as U.S. import and export controls and import controls of other countries. While the shutdown of Chemdex, Promedix and SpecialtyMD may limit future regulatory and product liability risks, until all statutes of limitation have expired, certain legal risks will remain.

      We relied on our suppliers to comply with applicable local, state and federal laws regarding the labeling and the dissemination of information on any products sold that may be hazardous or present a health threat to the user. If these suppliers have failed, or we have failed to maintain the requisite records irrespective of the actions of the suppliers, or if either of us have failed to adequately comply with labeling and information dispensing requirements of local, state or federal laws, then we may be held legally responsible, since we held title to these products, and could be subject to governmental penalties or fines, as well as private lawsuits to enforce these laws. We have also relied upon our suppliers to obtain appropriate approvals for products regulated by the Food and Drug Administration (“FDA”) and to comply with the requirements relating to those approvals and products. The failure of suppliers to obtain or comply with those approvals, or the failure of the product advertising or labeling to be consistent with the FDA approval for the products, or other failures by the products themselves, or our failure to keep regulatory records required by the FDA, such as complaint files, could result in costly product recalls, significant fines and judgments, civil and criminal liabilities and negative publicity. In addition, we may discover that we inadvertently sold other regulated products without a requisite license or permit or failed to fully comply with other local, state or federal laws governing these sales.

      Except as described in the next sentence, we are unaware of any current investigations, inquiries, citations, fines or allegations of violations or noncompliance relating to regulatory requirements pending by government agencies or by third parties against us. In February, 2001 we received a subpoena from the U.S. Department of Justice, Drug Enforcement Administration, for certain billing, invoice, and shipping records concerning sales to an unaffiliated purchaser. It is also possible that there may be investigations or allegations that we are not aware of or future investigations or allegations. The risk that any noncompliance

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Government Contracts and Compliance With Government Regulations May Subject Us to Increased Administrative Burdens and Risks That May Increase the Cost of Doing Business

      As a result of increased contracting with Federal, state and local agencies, we may become subject to additional laws and regulations not currently applicable to us thereby increasing our administrative burdens. Furthermore, we must comply with any new regulations in both Europe and the United States, as well as any other regulations adopted by other countries where we may do business. Compliance with any newly adopted laws may prove difficult and may harm our business, operating results and financial condition.

      Government entities may also terminate their contracts with us earlier than we expect which could result in revenue shortfalls. Government entities may also investigate and audit our contracts and, if any improprieties are found, we may be required to refund revenues we have received, to forego anticipated revenues and may be subject to penalties. In addition, if we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for future contracts may be adversely affected.

We Face Risks Associated With Stockholder and Bondholder Litigation

      Several class action lawsuits have been filed and served upon us alleging that we and certain individuals made false and misleading statements concerning our business model and earnings for fiscal 2000 and concerning our initial public offering. Although we believe that we have meritorious defenses to the actions and intend to defend the suits vigorously, we cannot predict with certainty the outcome of these lawsuits. Our defense against such lawsuits will be costly and will require a significant commitment of time and resources by our senior management.

Our Common Stock Price is Especially Volatile Which Could Result in Substantial Losses to Investors

      The stock market and specifically the stock prices of technology related companies have been very volatile. This broad market volatility and industry volatility may reduce the price of our common stock, because our business is Internet-based without regard to our operating performance. On a post reverse split basis, our common stock reached a high of $3,652.50 and traded as low as $8.85 during 2000, and had a high of $64.65 and low of $1.80 during 2001. Our stock reached a high of $7.25 and a low of $1.34 during fiscal 2002. On December 31, 2002 the last reported sales price on Nasdaq was $1.38.

Item 7A.     Qualitative and Quantitative Disclosure about Market Risk

Market Risk Disclosure

      The following discussion about the Company’s market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related primarily to changes in interest rates. However, we do not hold derivative financial instruments for speculative or trading purposes.

Interest Rate Sensitivity

      We are also exposed to interest rate risk related to our investment portfolios. We have performed a sensitivity analysis as of December 31, 2002, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of interest rates across the entire yield curve with all other variables constant. The discount rates used were based on the market interest rates in effect at December 31, 2002. The sensitivity analysis at December 31, 2002 indicated that a potential loss in the fair values of our interest rate sensitive investment instruments was not material.

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      Our convertible and promissory notes are not exposed to interest rate risk as our interest rate is fixed at 6%.

Foreign Currency Risk

      Our sales to-date have primarily been made to U.S. customers and, as a result, we have not had any exposure to factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. If our sales outside of the U.S. increase and are made in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets.

Item 8.     Financial Statements and Supplementary Data

      The Consolidated Financial Statements and Supplementary Data required by this Item are set forth in Item 15 below.

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      Not applicable.

PART III

      Portions of the information required in Part III of this report are incorporated by reference from the definitive Proxy Statement for the Company’s 2003 annual meeting, which the Company expects to file with the SEC within 120 days following the end of the fiscal year ended December 31, 2002.

Item 10.     Directors and Executive Officers of the Registrant

      The information required by this Item with respect to the Company’s executive officers is incorporated herein by reference from the information contained in Item 1 of Part I of this Report under the caption “Executive Officers of the Registrant.”

      The information required by this Item regarding the Company’s directors is incorporated herein by reference from the information provided under the heading “Proposal No. 1 — Election of Directors” of the Company’s Proxy Statement.

      The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the information provided under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement.

Item 11.     Executive Compensation

      The information required by this Item is incorporated herein by reference from the information provided under the heading “Compensation of Executive Officers” of the Company’s Proxy Statement.

Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The information required by this Item is incorporated herein by reference from the information provided under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” of the Company’s Proxy Statement.

Item 13.     Certain Relationships and Related Transactions

      The information required by this Item is incorporated herein by reference from the information provided under the heading “Certain Relationships and Related Transactions” of the Company’s Proxy Statement.

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Item 14.     Controls and Procedures

      (a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days prior to the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in ensuring that we are able to gather, analyze and disclose on a timely basis all information that is required to be disclosed in our Exchange Act reports.

      (b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

PART IV

Item 15.     Exhibits, Financial Statement Schedules and Reports on Form 8-K

      (a)(1) Financial Statements. The following financial statements of NexPrise are filed as part of this annual report on Form 10-K:

           Independent Auditors Report

      (a)(2) Financial Data Schedule. The financial statement Schedule II — VALUATION AND QUALIFYING ACCOUNTS is filed as part of this annual report on Form 10-K, at page 59.

      (a)(3) Exhibits. See the Exhibit Index on page 63 hereof. The exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K.

      (b) Reports on Form 8-K

	None.

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of NexPrise, Inc. (formerly “Ventro Corporation”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in Item 15(a)(1). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NexPrise, Inc. at December 31, 2002 and 2001 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

      As discussed in Note 3 to the consolidated financial statements, in 2002, NexPrise changed its method of accounting for goodwill and other intangible assets in accordance with guidance provided in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

	/s/ ERNST & YOUNG LLP

SAN JOSE, CALIFORNIA

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NEXPRISE, INC

CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements.

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NEXPRISE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(1)	Includes $8,306 in amortization of goodwill related to the equity interest in marketplace companies in 2000.

See accompanying notes to the consolidated financial statements.

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NEXPRISE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)