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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 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 [ü] No [  ]

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

     On September 30, 2003, 3,236,223 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
(in thousands)

(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 collaborative solutions for program management and quote management.

     As of September 30, 2003, the Company had working capital of approximately $5.0 million and stockholders’ equity of approximately $837,000. During the three months ended September 30, 2003, the Company used cash and cash equivalents in operating activities of approximately $1.6 million, an increase of approximately $400,000 from the $1.2 million used in the three months ended June 30, 2003. The increase in cash used in operating activities in the three months ended September 30, 2003 was primarily due to an insurance prepayment and higher salaries and benefits. 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 ended 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

     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. Our revenue recognition policy is in accordance with SOP No. 97-2, Software Revenue Recognition, as amended, and Staff Accounting Bulletin 101.

     Term licenses

     Term license revenue includes bundled term licenses, 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. In instances where maintenance is bundled with licenses of software products, such maintenance terms are typically one year.

     Perpetual licenses

     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

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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 of the fair value of maintenance for license agreements with and without stated renewal rates is based on the Company’s price list. VSOE of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by the Company’s customers when maintenance is sold separately. Past history has shown that the rate the Company charges for maintenance on license agreements with a stated renewal rate is similar to the rate the Company charges for maintenance on license agreements without a stated renewal rate. VSOE for training or consulting is based upon separate sales of these services. When software services are considered essential or the arrangement involves significant customization or modification of the software, both the net license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on input measures of hours, or completed contract method. 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 had not yet established VSOE for maintenance prior to March 31, 2003, and therefore is recognizing the revenue from license agreements entered into prior to March 31, 2003 ratably over the maintenance period. NexPrise established VSOE in the three months ended June 30, 2003.

     Training and Consulting

     Revenue for training or consulting services is recognized based on achievement of billable milestones as written in the contract, upon contract completion or on a time and materials basis.

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, Accounting for Stock Issued to Employees, in accounting for its employee stock options. Accordingly, no compensation expense is recognized in the Company’s financial statements in connection with employee stock awards where the exercise price of the award is equal to the fair market value of the stock on the date of grant. When stock options are granted with an exercise price that is lower than the fair market value of the stock on the date of grant, the difference is recorded as deferred compensation and amortized to expense on a straight-line basis over the vesting term of the stock options.

          Pro forma information regarding net loss and net loss per share is required by FAS 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called “stock-based awards”), under the fair value method of FAS 123. Stock-based awards have been valued using the Black-Scholes option-pricing model. Among other things, the Black-Scholes model considers the expected volatility of the Company’s stock price, determined in accordance with FAS 123, in arriving at an option valuation.

     The fair value of the Company’s stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

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          The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because the Company’s stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards.

          For purposes of pro forma disclosures, the estimated fair value of the stock-based awards is amortized to expense over the awards’ vesting period. The pro forma stock-based employee compensation expense has no impact on the Company’s cash flow. In the future, the Company may elect, or be required, to use a different valuation model, which could result in a significantly different impact on pro forma net income (loss). For purposes of this reconciliation, the Company adds back to previously reported net income all stock-based employee compensation expense that relates to acquisitions, then deducts the pro forma stock-based employee compensation expense determined under the fair value method for all awards. The Company’s pro forma information is as follows (in thousands, except per share amounts):

Concentration of Credit Risk and Significant Customers

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     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:

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 Loss

     SFAS No. 130, Reporting Comprehensive Income, establishes standards of reporting and display of comprehensive income and its components of net 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 loss for the three and nine months ended September 30, 2003 and 2002 were as follows (in thousands):

Note 4. Goodwill and Purchased Intangibles

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     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 intangible assets 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):

     NexPrise will continue to amortize the intangible asset balance of approximately $7.1 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 and InfoPrise purchased technology assets will be fully amortized in the three months ended December 31, 2005 under the current amortization schedule. The NexPrise trade name and non-compete intangible assets are amortized using a straight-line method over 2 and 3 year periods, respectively. The trade name asset was fully amortized in the three months ended September 30, 2003. The non-compete asset will be fully amortized in the three months ended September 30, 2004 under the current amortization schedule. The amortization of purchased intangible assets was approximately $604,000 and $2.1 million in the three and nine months ended September 30, 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, except share data):

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

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     The following unaudited pro forma information shows the results of operations of the Company for the three and nine months ended September 30, 2002 as if the business combination with InfoPrise had occurred at the beginning of the period. In process research and development charges of $399,000 are included for the three and nine months ended September 30, 2002. This data is not indicative of the results of operations that would have arisen if the 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 $283,000 and $841,000 as of September 30, 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):

On September 30, 2003, the Company sold its interest in Ingenuity Systems, a long-term investment accounted for under the cost method, to an unrelated party for cash proceeds of $1 million. As a result, a gain of $400,000 was recorded representing the proceeds of the sale less the carrying value of $500,000 and a fee under a net proceeds income agreement payable to DDP Ventures in the amount of $100,000. DPP Ventures is a related party owned by a former Chief Executive Officer of the Company and pursuant to the Net Proceeds Agreement signed in 2001, DDP Ventures is entitled to 10% of the net proceeds received by the Company for the liquidation of each of certain named investment assets.

Note 7. Equity Investments

     The following table outlines the Company’s equity investments in its marketplace companies as of September 30, 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 0.5%.

     The $287,000 investment gain reported for the nine months ended September 30, 2003 reflects the $400,000 gain described in Note 6 offset by a $113,000 write-down taken in the three months ended June 30, 2003 for an impairment of long-term investments deemed to be other than temporary. This investment was accounted for using the cost method. The investment gain of approximately $1.1 million and loss of $1.4 million in the three and nine months ended September 30, 2002, respectively, consist of equity losses in the marketplace companies in which we had a significant ownership percentage and approximately $186,000 of write-downs taken in the three months ended March 31, 2002, 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 common stock conversion price of $18.75 and interest rate of 6% in connection with the acquisition of InfoPrise. As of September 30, 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 September 30, 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. 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

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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 September 30, 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 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 September 30, 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 September 30, 2003 and December 31, 2002 (in thousands):

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Note 11. Deferred Stock-Based Compensation

     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 $221,000 and $288,000 in stock compensation expense for the nine months ended September 30, 2003 and 2002, respectively.

Note 12. Settlement, Restructuring and Discontinued Operations

     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, and settlements of various disputes and termination of leases. The net of these charges was reported as a component of loss from continuing operations.

     The Company paid approximately $12,000 in severance payments during the quarter ended March 31, 2003. In the quarter ending June 30, 2003, the Company reversed an accrual related to the Company’s cancellation of a contract as part of a restructuring in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activity ceased and no actual charges had been, or are now expected to be, paid. At September 30, 2003, and December 31, 2002, the Company had restructuring accruals and reserves of $0 and $505,000, respectively. An analysis of activity is as follows (in thousands):

     During the three months ended June 30, 2003 the Company reversed an accrual of $334,000 related to an estimated liability accrued upon the Company’s cancellation of a contract that had been part of operations discontinued in 2000 and which ceased functioning in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activities ceased and no actual charges had been, or are now expected to be, paid.

Note 13. Recent Accounting Pronouncements

     In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after September 15, 2003. The adoption of EITF Issue No. 00-21 has not had a significant impact on the Company’s results of operations or financial condition.

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     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 September 30, 2003. The Company will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.

     In April 2003, the FASB issued SFAS 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. The statement is effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities. This statement amends Statement 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, in connection with other Board projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The adoption of this Statement is not expected to have a significant impact on the Company’s results of operations or financial condition.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s consolidated financial statements.

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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 licenses, post contract support and, in most cases, hosting services and also includes perpetual licenses.

     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 common stock 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 September 30, 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 continue to develop and enhance our technology and service offerings and build our customer base.

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

     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. Our revenue recognition policy is in accordance with SOP No. 97-2, Software Revenue Recognition, as amended, and Staff Accounting Bulletin 101.

     Term licenses

     Term license revenue includes bundled term licenses, 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

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period of the license during which the services are expected to be provided. In instances where maintenance is bundled with licenses of software products, such maintenance terms are typically one year.

     Perpetual licenses

     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 of the fair value of maintenance for license agreements with and without stated renewal rates is based on the Company’s price list. VSOE of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by the Company’s customers when maintenance is sold separately. Past history has shown that the rate the Company charges for maintenance on license agreements with a stated renewal rate is similar to the rate the Company charges for maintenance on license agreements without a stated renewal rate. VSOE for training or consulting is based upon separate sales of these services. When software services are considered essential or the arrangement involves significant customization or modification of the software, both the net license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on input measures of hours, or completed contract method. 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 had not yet established VSOE for maintenance prior to March 31, 2003, and therefore is recognizing the revenue from license agreements entered into prior to March 31, 2003 ratably over the maintenance period. NexPrise established VSOE in the three months ended June 30, 2003. The Company must maintain VSOE on maintenance for perpetual licenses or risks an end to recognition of perpetual license revenue using the residual method and potentially revision to previously recognized perpetual license.

     Training and Consulting

     Revenue for training or consulting services is recognized based on achievement of billable milestones as written in the contract, upon contract completion or on a time and materials basis.

     Until VSOE was established for maintenance in the three months ended June 30, 2003, perpetual license revenue was taken ratably over the term of the maintenance period. In the three months ended June 30, 2003, we established VSOE for maintenance. Approximately 5% of the reported revenue for the three months ended September 30, 2003 consisted of perpetual license revenue that was recognized when the software was delivered. Approximately 1% of the revenue recognized for the three months ended September 30, 2003 consisted of consulting and training. The remaining 94% of revenue recognized for the three months ended September 30, 2003 consisted of revenue being recognized ratably over the contract term and is made up of bundled subscriptions and perpetual licenses with maintenance sold prior to the establishment of VSOE for maintenance.

     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 which is calculated using discounted cash flows. 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, and 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

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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

     Net Revenues. NexPrise’s revenues were $814,000 and $2,537,000 for the three and nine months ended September 30, 2003, an increase of 12% over the $728,000 in revenue for the three months ended September 30, 2002 and 23% over the $2,055,000 reported for the nine months ended September 30, 2002. The increase was driven by products and services sold to new customers as well as increased capacity sold to existing customers. The revenue is made up primarily of bundled subscriptions and maintenance and licenses 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. Approximately 94% and 88% of the revenue recognized for the three and nine months ended September 30, 2003, respectively, consisted of revenue being recognized ratably over the contract term and is made up of bundled subscriptions and perpetual licenses, with maintenance, sold prior to the establishment of VSOE for maintenance. Approximately 5% and 7% of the revenue recognized for the three and nine months ended September 30, 2003, respectively, consisted of perpetual license revenue recognized when the software was delivered and not ratably over the contract. The remaining 1% and 5% of the revenue recognized for the three and nine months ended September 30, 2003, respectively consisted of consulting and training.

     Cost of Product Licenses and Services. The cost of product licenses and services was $238,000 and $824,000 for the three and nine months ended September 30, 2003, respectively, a decrease of 42% from the $407,000 reported for the three months ended September 30, 2002 and of 28% from the $1,148,000 reported for the nine months ended September 30, 2002. These costs consisted 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. The decrease was primarily due to lower hosting, maintenance and technical support services expenses realized when the Company rationalized its hosting environment in the second half of 2002.

     Cost of Amortization of Purchased Technology. Amortization of the developed technology intangible assets acquired in the purchases of NexPrise in August 2001 and InfoPrise in February 2002 was $491,000 and $1,473,000 for the three and nine months ended September 30, 2003, respectively, an increase of 122% and 123%, respectively. These assets are being amortized based on forecast revenue and will be fully amortized in 2005.

     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 $749,000 and $2.1 million for the three and nine months ended September 30, 2003, respectively, a decrease of 28% from the $1.0 million reported for the three months ended September 30, 2002, and 52% from the $4.4 million reported for the nine months ended September 30, 2002. The decrease for the three months ended September 30, 2003 was largely driven by a reduction in depreciation expense. The decrease for the nine months ended September 30, 2003 was largely driven by the lower depreciation and reductions in workforce in January through May, 2002. 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 nine months ended September 30, 2002. No such expenses were incurred during any of the other reported periods. 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 $1.1 million and $3.0 million during the three and nine months ended September 30, 2003, respectively, a decrease of 16% from the $1.3 million reported for the three months ended September 30, 2002 and 34% from the $4.5 million reported for the nine months ended September 30, 2002. The decrease was driven by reductions in workforce performed throughout 2002 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 $631,000 and $2.2 million for the three and nine months ended September 30, 2003, respectively, a decrease of 44% from the $1.1 million reported for the three months ended September 30, 2002 and of 48% from the $4.3 million reported for the nine months ended September 30, 2002. The decrease was driven by reductions in infrastructure costs and workforce carried out throughout 2002.

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     Restructuring & Settlement. In the three months ended June 30, 2003, the Company reversed a restructuring and settlement accrual related to the Company’s cancellation of a contract as part of a restructuring in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activity ceased and no actual charges had been, or are now expected to be, paid. The reversal resulted in a credit of $493,000 being reported on the restructuring line of the statement of operations.

     Interest Expense. Interest expense was $189,000 and $567,000 in the three and nine months ended September 30, 2003, respectively, a decrease of $1,000 from the $190,000 reported for the three months ended September 30, 2002 and an increase of $8,000 from the $559,000 reported in the nine months ended September 30, 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 September 30, 2003. In addition, the remaining deferred offering costs of approximately $163,000 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, was $57,000 and $218,000 in the three and nine months ended September 30, 2003, respectively, a decrease of $6,000 from the $63,000 reported for the three months ended September 30, 2002 and an increase of $61,000 from the $157,000 reported for the nine months ended September 30, 2002. Interest income and other, net, has been derived primarily from earnings on investments in cash equivalents and short-term investments. Also included is a gain on disposal of assets in the three months ended September 30, 2003 of approximately $37,000. The increase for the nine months ended September 30, 2003 is due to the aforementioned gain on disposal of assets, a $72,000 foreign exchange loss incurred in 2002 that was not incurred in 2003 and the reversal of estimated taxes associated with the gain from retirement of bonds in 2001. All tax returns have been filed and no liability was incurred.

     Investment Income (loss). Investment income for the three and nine months ended September 30, 2003 was $400,000, and $287,000 a 62% decrease from the $1.1 million reported for the three months ended September 30, 2002 and a $1.7 million increase from the $1.4 million investment loss reported for the nine months ended September 30, 2002. The investment income of $400,000 reported in the three months ended September 30, 2003 reflects a gain from the Company’s sale of its interest in Ingenuity Systems. The investment income of $1.1 million reported in the three months ended September 30, 2002 reflects a gain of $1.8 million from the Company’s August 2002 sale of its interest in Amphire and reflects equity losses of approximately $700,000 in the marketplace companies in which we had a significant ownership percentage. The investment income of $287,000 for the nine months ended September 30, 2003 reflects the aforementioned gain of $400,000 and approximately $113,000 in write-downs for an impairment deemed to be other than temporary on an investment accounted for using the cost method. The investment loss for the nine months ended September 30, 2002 reflects a gain of $1.8 million from the Company’s August 2002 sale of its interest in Amphire, approximately $3.0 million of equity losses in the marketplace companies in which we have a significant ownership percentage and $186,000 of write-downs of investments accounted for using the cost method. We do not expect significant investment income or losses in future quarters.

     Loss from continuing operations. As a result of the changes described above, the net loss from continuing operations was approximately $2.1 million and $6.7 million for the three and nine months ended September 30, 2003, respectively, a decrease of 13% from the $2.4 million net loss reported for the three months ended September 30, 2002 and of 58% from the $15.2 million reported for the nine months ended September 30, 2002.

     Gain from discontinued operations. In the quarter ended June 30, 2003, the Company reversed an accrual of $334,000 related to an estimated liability accrued upon the Company’s cancellation of a contract that had been part of operations discontinued in 2000 and which ceased functioning in 2001. The reversal was made in accordance with Company policy, as two years had passed since the related activities ceased and no actual charges had, or are now expected to be, paid.

Liquidity and Capital Resources

     As of September 30, 2003 NexPrise had approximately $7.7 million of cash, cash equivalents and short-term investments and working capital was approximately $5.0 million.

     Net cash used in operating activities was approximately $3.5 million for the nine months ended September 30, 2003 compared to $13.7 million of net cash used in operating activities for the nine months ended September 30, 2002. Net cash used in operating

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activities for the nine months ended September 30, 2003 is primarily attributable to the net loss for the period less non-cash items. Non-cash items primarily consisted of depreciation and amortization of $2.6 million offset by a gain from the sale of an investment of $400,000.

     Net cash provided by investing activities totaled $3.0 million for the nine months ended September 30, 2003, compared to net cash provided by investing activities of $2.1 million for the nine months ended September 30, 2002. During the nine months ended September 30, 2003, the Company had net sales and maturities of approximately $2.0 million of short-term investments, received cash of $1.0 million from the sale of Ingenuity Systems and purchased approximately $37,000 in property and equipment. During the nine months ended September 30, 2002, the Company had net sales and maturities of approximately $600,000 of short-term investments, received cash of approximately $1.0 million as part of the acquisition of InfoPrise and a decrease in restricted cash of $520,000.

     Net cash provided in financing activities was $11,000 for the nine months ended September 30, 2003 and resulted primarily from the issuance of common stock under employee stock compensation plans. Net cash used in financing activities was $100,000 for the nine months ended September 30, 2002 and resulted primarily from the principal payments on our capital lease obligations. This lease was paid in full as of September 30, 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 and 2003 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 currently 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 September 30, 2003 (in thousands):