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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2003

OR

For the transition period from           to           .

Commission file number: 0-26811

NexPrise, Inc.

5950 La Place Court, Suite 200
Carlsbad, CA 92008
760-804-1333
(Address, including zip code, and telephone
number, including area code, of Registrant’s principal
executive offices)

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

     On March 31, 2003, 3,226,471 shares of the registrant’s common stock, $.0002 par value per share, were issued and outstanding.

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NEXPRISE, INC.
FORM 10-Q

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NEXPRISE, INC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share value)

(1)

Derived from December 31, 2002 audited consolidated financial statements. See accompanying notes to consolidated financial statements.

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NEXPRISE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

See accompanying notes to consolidated financial statements

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NEXPRISE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to consolidated financial statements

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NEXPRISE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note 1. Description of Business

     NexPrise, Inc. (the “Company” or “NexPrise” or “we”), formerly known as Ventro Corporation and Chemdex Corporation, is a seller of business process applications and provides solutions and services that enable discrete manufacturing companies to address their specific business challenges. These solutions complement and expand on currently installed enterprise systems and allow for the continuous process improvements required to meet customers’ changing business demands.

     As of March 31, 2003, the Company had working capital of approximately $6.3 million and stockholders’ equity of approximately $4.4 million. During the three months ended March 31, 2003 the Company used cash and cash equivalents in operating activities of approximately $700,000, which included the collection of a non-trade receivable of approximately $500,000. Management believes it has sufficient working capital to support the Company’s planned activities through 2003 and beyond.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. While the quarterly financial information is unaudited, the financial statements included in this Form 10-Q reflect all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for the interim periods are not necessarily indicative of the results for the entire year. The consolidated balance sheet as of December 31, 2002 has been derived from the audited consolidated balance sheet as of that date. The information included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ending December 31, 2002.

Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

     Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.

Revenue Recognition

     Revenue is made up primarily of subscriptions of bundled term license, post contract support and, in most cases, 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 license during which the services are expected to be provided. Revenue for training or consulting services that are not bundled with a subscription is recognized based on achievement of billable milestones as written in the contract or upon contract completion and currently makes up less than 10% of overall revenue. Perpetual license revenue is recognized using the residual method described in Statement of Position (“SOP”) No. 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element (for example, undelivered maintenance and support, training and consulting). The determination of fair value is based upon vendor specific objective evidence (“VSOE”). VSOE for training or consulting is based upon separate sales of these services. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue. Our perpetual arrangements may include initial maintenance extending over a period of time with no renewal rate, which requires perpetual license revenue to be taken ratably over the contract period. NexPrise has not yet established VSOE for maintenance and therefore has recognized the revenue from license agreements entered into prior to March 31, 2003 ratably over the maintenance period.

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     Our revenue recognition policy is in accordance with SOP No. 97-2, Software Revenue Recognition, as amended, and Staff Accounting Bulletin (“SAB”) 101. For all arrangements, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.

Net Income (Loss) Per Share

     Net income (loss) per share is presented in accordance with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share, which requires dual presentation of basic earnings per share (“EPS”) and diluted EPS.

     Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and potentially dilutive shares outstanding during the period.

Stock-Based Compensation

     In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transition guidance and disclosure provisions of SFAS 148 are effective for the Company’s financials statements issued for 2003.

     The Company has elected to follow Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, in accounting for its employee stock options. No compensation expense is recognized for share purchase rights granted under the Company’s employee stock options and employee stock purchase plan. Had compensation cost for the Company’s employee stock options and employee stock purchase plan been determined based on fair value at the grant date consistent with SFAS 123, the Company’s net loss and earnings loss per share would have been reduced to the pro forma amounts indicated below:

Concentration of Credit Risk and Significant Customers

     The Company’s customer base consists of businesses located primarily in North America. The Company maintains allowances for potential credit losses and historically, such losses have been within management’s expectations. Revenue and accounts receivable by customers comprising more than 10% of total amounts are as follows:

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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. Effective January 1, 2002, in conjunction with the implementation of SFAS No. 142, goodwill is no longer amortized and potential impairment of goodwill and purchased intangible assets with indefinite useful lives is evaluated using the specific guidance provided by SFAS No. 142. This impairment analysis is performed at least annually. Also effective January 1, 2002, potential impairment of long-lived assets other than goodwill and purchased intangible assets with indefinite useful lives is evaluated using the guidance provided by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Note 3. Comprehensive Income (Loss)

     SFAS No. 130, Reporting Comprehensive Income, establishes standards of reporting and display of comprehensive income and its components of net income (loss) and “Other Comprehensive Income.” Other Comprehensive Income refers to revenues, expenses, gains and losses that are not included in net income (loss) but rather are recorded directly in stockholders’ equity. The components of comprehensive income (loss) for the 3 months ended March 31, 2003 and 2002 were as follows (in thousands):

Note 4. Goodwill and Purchased Intangibles

     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.

     Subsequent to the adoption of SFAS 142, identifiable intangible assets with definite lives will continue to be amortized over their useful lives and will be reviewed for impairment in accordance with SFAS 144 when impairment indicators exist. These assets are shown as intangible assets on the face of the balance sheet and are as follows (in thousands):

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     NexPrise will continue to amortize the intangible asset balance of approximately $8.4 million over the remaining useful lives of the intangible assets. NexPrise purchased technology is amortized based on forecasted revenue over 5 years. InfoPrise purchased technology is amortized based on forecasted revenue over 3 years. The NexPrise trade name and non-compete intangible assets are amortized using a straight line method over 2 and 3 year periods, respectively. The amortization of purchased intangible assets was approximately $745,000 in the three months ended March 31, 2003 and $2.3 million in fiscal 2002, which included $399,000 of in-process research and development. Estimated intangible amortization expense for the years ended December 31, 2003 and 2004 are $2.6 million and $2.9 million, respectively.

Note 5. Business Combinations

     In February 2002 NexPrise acquired privately held InfoPrise, Inc. (“InfoPrise”), a provider of data management solutions located in Carlsbad, California. As consideration for the acquisition, which was accounted for using the purchase method, NexPrise agreed to issue unsecured convertible promissory notes with a face value of $3,040,000 due 2007. The notes bear interest at a rate of 6% and are convertible into the Company’s common stock at $18.75 per share. The Company also issued 139,790 shares of NexPrise common stock and assumed InfoPrise’s outstanding stock options, which may result in the issuance of up to approximately 64,666 shares of NexPrise common stock. An independent valuation study was commissioned to value the intangible assets associated with the InfoPrise purchase and facilitate the purchase accounting.

     The following table summarizes the forms of consideration and their fair values (in thousands):

     A summary of the InfoPrise purchase transaction is shown below (in thousands):

     The following unaudited pro forma information shows the results of operations of the Company for the three months ended March 31, 2002 as if the business combinations with NexPrise and InfoPrise had occurred at the beginning of the period. In process research and development charges of $399,000 are included for the three months ended March 31, 2002. No such charges have been included for the three months ended March 31, 2003. This data is not indicative of the results of operations that would have arisen if the

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business combinations had occurred at the beginning of the respective periods and is not intended to be indicative of future results of operations (in thousands except per share data).

Note 6. Balance Sheet Details

Other Current Assets

     Other current assets of $332,000 and $841,000 as of March 31, 2003 and December 31, 2002, respectively, are comprised primarily of prepaid royalties, current deposits and other receivables.

Other Long-term Assets

     Other long-term assets are comprised of the following (in thousands):

Note 7. Equity Investments

     The following table outlines the Company’s equity investment activity with its marketplace companies for the three months ended March 31, 2002 and 2003 (in thousands, except percentage data):

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     In March 2003, Ketera (fka MarketMile) secured an additional round of funding that NexPrise did not participate in. As a result, NexPrise’s ownership percentage of Ketera has decreased to 1.3%. The 2002 investment loss of approximately $1.4 million is made up of approximately $1.2 million of equity losses in the marketplace companies in which we had 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.

Note 8. Convertible Notes

     In February 2002 NexPrise issued unsecured, convertible promissory notes due in 2007 with a face value of $3,040,000, a conversion price of $18.75 and interest rate of 6% in connection with the acquisition of InfoPrise. As of March 31, 2003, no amount of the notes had been converted into NexPrise common stock. In April 2000, NexPrise issued $250 million of convertible subordinated notes due in 2007, bearing annual interest at 6% and convertible at the option of the holder into the Company’s common stock at a price of $1,361.70 per share. The Company subsequently repurchased $241.2 million of these notes during 2001. Approximately $8.8 million of the convertible subordinated notes remained outstanding as of March 31, 2003 and December 31, 2002.

Note 9. Contingencies

     In 2001, several class action lawsuits, including one derivative suit, were filed and served on the Company alleging that the Company and certain individuals made false and misleading statements concerning our business model and earnings for fiscal 2000. The Company is also a defendant in the initial public offering class action suits filed against issuers and the investment banks alleging that the offering documents were false and misleading. 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. Although the Company has insurance to cover these claims, the recovery of all future costs is not assured. The Company has also been served with a stockholder derivative action but is named solely as a nominal defendant against whom no recovery is sought.

     A subtenant has attempted to renegotiate its sublease agreement with us. We have drawn upon the subtenant’s security deposit to cover our expenses to date. If we are unable to successfully resolve this situation our sublease income may not be enough to pay what we may be liable for in ongoing lease payments. The Company has accrued for expected additional costs as a result of the potential loss of this sublease income.

     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.

Discontinued Marketplace Companies Formerly Known as Promedix and Chemdex

     Contracts with Promedix and Chemdex customers and suppliers contained, in some cases, cancellation notification periods longer than the Company provided. In some cases, shorter notification periods caused inconvenience to customers and suppliers, and the Company has been notified by several suppliers that discontinuing the marketplace represents a breach of Promedix contractual obligations. Additionally, two customers of Chemdex have informed the Company that they did not receive notice of the termination of their contracts within the contractually required time period. However, as of March 31, 2003, no customer or supplier of Promedix or Chemdex had filed a formal complaint with the Company.

Government Regulations

     In addition to regulations applicable to businesses generally, the Company is or may be 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 in vitro 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.

     The Company relied on its 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 had failed to

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adequately comply with labeling and information dispensing requirements of local, state or federal laws, then the Company may be held legally responsible, since Company held title to these products, and could be subject to governmental penalties or fines, as well as private lawsuits to enforce these laws.

     Finally, the Company has relied upon its suppliers to obtain appropriate approvals for products regulated by the 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 February 2001, the Company 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. Other than the foregoing, the Company is unaware of any current investigations, inquiries, citations, fines or allegations of violations or non-compliance relating to regulatory requirements pending by government agencies or by third parties against us. It is possible, however, that there may be such investigations or allegations that the Company is not aware of or future investigations or allegations. The risk that any noncompliance may be discovered in the future is currently unknown. Although any potential impact on the Company for noncompliance cannot currently be established, it could result in significant civil or criminal penalties, including monetary fines and injunctions, for noncompliance and negative publicity, and seriously harm our business, revenues, results of operations and financial condition.

Indemnification

     The Company sells software licenses and services to its customers under contracts which the Company refers to as Software License and Service Agreements (each an “SLSA”). Each SLSA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be incurred by or awarded against the customer in the event the Company’s software or services are found to infringe upon a patent, copyright, trade secret, trademark, or other proprietary right of a third party. The SLSA generally limits the scope of remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain product usage limitations and geography-based scope limitations and a right to replace an infringing product or modify it to make it non-infringing. If the Company cannot address the infringement by replacing the product or services, or modifying the product or services, the Company is allowed to cancel the license or services and return the fees paid by the customer. The Company requires its employees to sign a proprietary information and inventions assignment agreement, which assigns the rights in its employees’ development work to the Company.

     To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of March 31, 2003. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. There can be no assurance that potential future payments will not have a material adverse effect on the Company’s business, results of operations or financial condition.

Note 10. Accrued Expenses

     Accrued expenses were comprised of the following as of March 31, 2003 and December 31, 2002 (in thousands):

Note 11. Deferred Stock-Based Compensation

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     In connection with the acquisition of InfoPrise completed in February 2002, the Company assumed the outstanding options granted under the InfoPrise stock option plans. The Company recorded deferred compensation of $132,293 for the difference between the exercise price of the unvested options assumed and the fair value of the common stock underlying those options as of the date the acquisition was consummated. That charge is being amortized over the remaining vesting period of the options. Additionally, the Company recorded deferred compensation of $184,178 with respect to the issuance of restricted common stock. That charge is being amortized over the remaining vesting period of the stock.

     The Company recognized $84,000 and $86,000 in stock compensation expense for the three months ended March 31, 2003 and 2002, respectively.

Note 12. Settlement, Restructuring and Other Charges

     During the year ended December 31, 2002, the Company took actions to improve efficiencies and reduce operating costs, including 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.

     The Company paid approximately $12,000 in severance payments during the quarter ended March 31 ,2003. At March 31, 2003 and December 31, 2002 the Company had accruals and reserves of $493,000 and $505,000, respectively. An analysis of activity is as follows (in thousands):

Note 13. Recent Accounting Pronouncements

     In July 2002 , the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44 and 64 , Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds SFAS 4 and SFAS 64 related to classification of gains and losses on debt extinguishment such that most debt extinguishment gains and losses will no longer be classified as extraordinary. FASB 145 also amends SFAS 13 with respect to sale-leaseback transactions. We adopted SFAS 145 on January 1, 2003 and it will require the reclassification of the gain on the extinguishment of debt from an extraordinary item in our results of operations.

     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 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”). 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. They did not have a material impact on the 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

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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.

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. The Company does not have any ownership in any variable interest entities as of March 31, 2003. The Company will apply the consolidation requirements of FIN 46 in future periods should interest in a variable interest entity be acquired.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 Management’s Discussion and Analysis and the Risk Factors section of NexPrise’s Annual Report on Form 10-K and the section entitled “Risk Factors” in this Form 10-Q.

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 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 March 31, 2003 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 and, in most cases, 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 license during which the services are expected to be provided. Revenue for training or consulting services is recognized based on achievement of billable milestones as written in the contract or upon contract completion and currently makes up less than 10% of overall revenue. Perpetual license revenue is recognized using the residual method described in SOP 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element (for example, undelivered maintenance and support, training and consulting). The determination of fair value is based upon vendor specific objective evidence (“VSOE”). VSOE for training or consulting is based upon separate sales of these services. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue. Our perpetual arrangements may include initial maintenance extending over a period of time with no renewal rate, which requires perpetual license revenue to be taken ratably over the contract period. Until VSOE has been established for maintenance, perpetual license revenue will be taken

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ratably over the term of the maintenance period. Our revenue recognition policy is in accordance with Statement of Position No. 97-2 (“SOP 97-2”), Software Revenue Recognition, as amended, and Staff Accounting Bulletin 101. For all arrangements, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.

     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 NexPrise’s 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 our 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 that 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 as potential ranges of probable losses. A determination of the amount of accruals required, if any, for these contingencies is made after analysis of each matter, which includes discussion with counsel retained in such matter. The required accruals may change in the future due to new developments in a matter or changes in strategies to resolve that matter, including changes in litigation defense and settlement strategies. If a change in circumstances resulted in a materially adverse outcome or judgment against NexPrise, NexPrise could be required to expend cash intended to fund operations in defense of the Company and might then have an insufficient amount of cash to meet other obligations.

Results of Operations

     Revenues. NexPrise reported $721,000 of revenue for the three months ended March 31, 2003, an increase of 6.9% over the $674,000 reported for the three months ended March 31, 2002. This revenue is made up primarily of subscriptions and maintenance for the Company’s collaborative commerce and business process automation solutions generated subsequent to our August 8, 2001 acquisition of privately-held NexPrise, Inc. and our February 2002 acquisition of privately-held InfoPrise, Inc. Subscription revenue entails recognizing the value of the customer contract as revenue ratably over the term of the contract.

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     Cost of Revenues. Cost of revenues were approximately $772,000 in the three months ended March 31, 2003, an increase of 43.7% from the approximately $537,000 recorded in the three months ended March 31, 2002. The increase is primarily due to higher amortization of the developed technology intangible assets acquired in the purchases of NexPrise in August 2001 and InfoPrise in February 2002. The remainder of cost of revenues consists primarily of outsourced hosting services for our customers, personnel and other expenses associated with providing maintenance and technical support services and royalties payable to third parties whose software is incorporated in the NexPrise solution.

     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 were approximately $794,000 during the three months ended March 31, 2003, a decrease of 55.9% from the $1.8 million reported for the three months ended March 31, 2002. The decrease was largely driven by reductions in workforce. To date, all software development costs have been expensed in the period incurred. We believe that continued investments in research and development are required to remain competitive.

     In Process Research and Development. The Company expensed $399,000 of acquired in-process research and development for the three months ended March 31, 2002. The in-process research and development was acquired as a result of the purchase of InfoPrise in February 2002. The Company determined the amount of in process research and development through an independent valuation performed in connection with the allocation of the InfoPrise 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 were approximately $967,000 during the three months ended March 31, 2003, a decrease of 42.1% from the $1.7 million reported for the three months ended March 31, 2002. The decrease was driven by reductions in workforce and reduced spending on marketing programs. The Company expects sales and marketing expenses in future quarters to increase as investments are made in the personnel and programs needed 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 were approximately $700,000, a decrease of 59.4% from the $1.7 million reported for the three months ended March 31, 2002. The decrease was driven by reductions in infrastructure costs and reductions in workforce.

     Interest Expense. Interest expense in the three months ended March 31, 2003 was approximately $189,000, an increase of 6.8% from the $177,000 reported for the three months ended March 31, 2002. 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 March 31, 2003. In addition, the remaining deferred offering costs of approximately $187,000 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. See Note 8 for further details on the outstanding notes.

     Interest Income and Other, Net. Interest income and other, net, in the three months ended March 31, 2003 was approximately $33,000, an increase of approximately $13,000 from the $20,000 reported for the three months ended March 31, 2002. Interest income and other, net, has been derived primarily from earnings on investments in cash equivalents and short-term investments. The increase in interest income and other, net is primarily attributable to $73,000 of foreign exchange losses incurred in 2002 that were not incurred in 2003. This decrease was partially offset by a decline in interest income in the three months ended March 31, 2002 due to lower interest rates and a decrease in the cash balance earning interest.

     Investment Losses. The 2002 investment loss of approximately $1.4 million is made up of approximately $1.2 million of equity losses in the marketplace companies in which we had 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. The book value of these investments was approximately $613,000 as of March 31, 2003. The remaining investment is accounted for using the cost method.

     Net Loss. As a result of the changes described above, the net loss was approximately $2.7 million in 2003, a decrease of 61.7% from the approximately $7.0 million net loss reported for the three months ended March 31, 2002.

Liquidity and Capital Resources

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     As of March 31, 2003 NexPrise had approximately $9.5 million of cash, cash equivalents, short-term investments and restricted cash; working capital was approximately $6.3 million.

     Net cash used in operating activities was approximately $684,000 for the three months ended March 31, 2003 compared to $5.6 million of net cash used in operating activities for the three months ended March 31, 2002. Net cash used in operating activities for the three months ended March 31, 2003 is primarily attributable to the net loss for the period less non-cash expenses. Non-cash items primarily consisted of depreciation and amortization of $881,000. The cash flows used in operating activities were partially offset by decreases in accounts receivable, prepaid expenses and other current assets.

     Net cash used in investing activities totaled $26,000 for the three months ended March 31, 2003, compared to net cash used in investing activities of $4.6 million for the three months ended March 31, 2002. During the three months ended March 31, 2002, the Company had net sales and maturities of approximately $5.6 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 $100,000 for the three months ended March 31, 2002 and resulted primarily from the principal payments on our capital lease obligations. This lease was paid in full as of March 31, 2002.

     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 March 31, 2003 (in thousands):

(a)          Operating lease has not been offset by expected sublease income of approximately $924,000

Risk Factors

     This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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-Q, the following risk factors should be carefully considered in evaluating NexPrise and its business because such factors currently may have significant impact on NexPrise’s business, operating results and financial condition.

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     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;
	•		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 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 for employee stock options as a compensation expense, could, if mandated, materially increase the expenses we report under generally accepted accounting principles and adversely affect our operating results.

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

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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.

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™ 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.

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     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 $2.7 million during the three months ended March 31, 2003. As of March 31, 2003 we had an accumulated deficit of approximately $627 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 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.

     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.

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     Recent political events, including the U.S. military action in the Middle East, 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 penny stock and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Because of these additional obligations, some brokers may be unwilling to effect transactions in penny stocks. This could have an adverse effect on the liquidity of our common stock and the ability of investors to sell the common stock.

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.

Our Business Will Suffer If We Do Not Enhance Our Product or Introduce New Features to Meet Changing Customer Requirements

     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 networking products. To the extent that such problems occur, we may face adverse publicity, delay in market acceptance of our services or customer claims against us, any of which could harm our business.

Adopting a Business Model That Includes the Sale of Perpetual Licenses to our Software Products May Not Result in Immediate Recognition of License Revenue

     We expect to sell a greater proportion of perpetual software licenses and fewer subscriptions to term licenses in coming quarters. When certain criteria are met, including the establishment of vendor specific objective evidence (VSOE) for the prices of the elements sold in an arrangement that includes perpetual licenses, the sale of a perpetual software licenses can result in the recognition of the revenue for the perpetual license in the period in which it is delivered. If NexPrise is able to meet these criteria, revenue for arrangements that include a perpetual license would be recognized sooner than it would be under a subscription method of accounting and, therefore, revenue growth in the period in which the licenses are sold would be greater than it would have been under the subscription method. There can be no assurance that NexPrise will be able to establish VSOE or meet all the other criteria required to

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transition to a perpetual license model. If the criteria are not met the revenue for the perpetual license portion of the arrangement will likely be recognized over the term of the maintenance period and will not be recognized upon delivery of the perpetual license. If that is the case, revenue growth will not accelerate due to the inclusion of perpetual licenses in our sales mix.

Our Products May Contain Defects That Could Harm Our Reputation, Be Costly to Correct, Delay Revenue and Expose Us to Litigation

     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.

We Anticipate Our Operating Results Will Fluctuate Significantly from Quarter-to-Quarter

     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.

We Are Dependent on Intellectual Property and on Products Licensed or Purchased from Third Parties and are Exposed to Legal Liability for Infringement

     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 our proprietary information to execute confidentiality agreements with us and by restricting access to our source code.

     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.

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     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.

Non-Compliance with Government Regulations May Subject Us to Liability

     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 may be discovered in the future is currently unknown. Although any potential impact on us for noncompliance cannot currently be established, it could result in significant civil or criminal penalties, including monetary fines and injunctions, for noncompliance and negative publicity, and seriously harm our business, revenues, results of operations and financial condition.

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.

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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 March 31, 2003 the last reported sales price on Nasdaq was $4.00.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

     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 March 31, 2003, 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 March 31, 2003. The sensitivity analysis at March 31, 2003 indicated that a potential loss in the fair values of our interest rate sensitive investment instruments was not material.

     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 4. 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 accounting 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 II. OTHER INFORMATION

Item 1. Legal Proceedings

     Starting 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

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during time periods from December 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 the 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. Litigation, Master File No. Civ. 01-1287 SBA, and a consolidated complaint was filed. On July 30, 2002, the Company and other defendants named in the action filed motions to dismiss. On March 31, 2003, the Court granted in part and denied in part the motions to dismiss. The Court ordered the plaintiffs to file an amended complaint by no later than May 15, 2003. No discovery has taken place, and the Court has not set a trial date. The Company believes that the claims are without merit and intends to defend the case vigorously.

     In August 2001, Chadwell v. Byers, Case No. CV800814, a putative shareholder 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 whom no recovery is sought. After a demurrer was sustained with leave to amend, the parties stipulated to a stay of proceedings pending a determination of the sufficiency of the complaint in the In re Ventro Corp. Sec. Litigation 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.

Item 2. Changes in Securities and Use of Proceeds

     None

Item 3. Defaults upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Securities Holders

     None

Item 5. Other Information

     None

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Item 6. Exhibits and Reports on Form 8-K

     (a)     Exhibits. The following is a list of exhibits filed as part of this Report on Form 10-Q. Where indicated by footnote, exhibits that were previously filed are incorporated by reference.

     (b)    Reports on Form 8-K: None

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 02, 2003.

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CERTIFICATIONS

I, Ted Drysdale, certify that:

1.          I have reviewed this quarterly report on Form 10-Q of NexPrise, Inc. (the “Registrant”);

2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.          I:

			(A) am responsible for establishing and maintaining internal controls;
			(B) have designed such internal controls to ensure that material relating to the Registrant and its consolidated subsidiaries is made known to me by others within those entities for the period in which the Report was prepared;
			(C) have evaluated the effectiveness of the Registrant’s internal controls as of May 02, 2003 and
			(D) have presented in the Report my conclusions about the effectiveness of the Registrant’s internal controls based upon my evaluation as of May 02, 2003.

5.          I have disclosed to the Registrant’s auditors and the audit committee of the Registrant’s board of directors the following:

			(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
			(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls.

6.          I have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Jerome E. Natoli, certify that:

1.          I have reviewed this quarterly report on Form 10-Q of NexPrise, Inc. (the “Registrant”);

2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.          I:

			(A) am responsible for establishing and maintaining internal controls;
			(B) have designed such internal controls to ensure that material relating to the Registrant and its consolidated subsidiaries is made known to me by others within those entities for the period in which the Report was prepared;
			(C) have evaluated the effectiveness of the Registrant’s internal controls as of May 02, 2003, and
			(D) have presented in the Report my conclusions about the effectiveness of the Registrant’s internal controls based upon my evaluation as of May 02, 2003.

5.          I have disclosed to the Registrant’s auditors and the audit committee of the Registrant’s board of directors the following:

			(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
			(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls.

6.          I have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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EXHIBIT INDEX

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