VERTICALNET INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-25269

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

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

300 CHESTER FIELD PARKWAY
MALVERN, PENNSYLVANIA 19355
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(610) 240-0600

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days:

Yes [X] No [ ]

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

As of November 7, 2002, 13,678,405 shares of the Registrant's common stock were
outstanding.

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VERTICALNET, INC.

FORM 10-Q
(FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002)

TABLE OF CONTENTS

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VERTICALNET, INC.

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

See accompanying notes to consolidated financial statements.
3

VERTICALNET, INC.

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

See accompanying notes to consolidated financial statements.
4

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See accompanying notes to consolidated financial statements.
5

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(IN THOUSANDS)

See accompanying notes to consolidated financial statements.
6

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)

See accompanying notes to consolidated financial statements.
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VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) BACKGROUND AND BASIS OF PRESENTATION

Description of the Company

Verticalnet, Inc. was incorporated in Pennsylvania on July 28, 1995. We are
a provider of collaborative supply chain solutions that enable companies and
their supply and demand chain partners to communicate, collaborate, and conduct
commerce more effectively. With a comprehensive set of collaborative supply
chain software applications including spend management, strategic sourcing,
collaborative planning, and order management, we offer a broad integrated supply
chain solution delivered through a multi-party platform.

On February 13, 2002, we announced our intention to sell the Small/Medium
Business ("SMB") unit (formerly referred to as Verticalnet Markets). We
completed the sale of the SMB group on June 28, 2002. The SMB group operated and
managed 59 industry-specific on-line marketplaces. The operating results of this
unit through June 28, 2002 have been reflected as discontinued operations in our
consolidated financial statements. The assets and liabilities of this unit at
December 31, 2001 are reflected as held for disposal in our consolidated balance
sheet.

On January 31, 2001, we completed the sale of our Verticalnet Exchanges
("NECX") business unit, which focused on trading electronic components and
hardware in open and spot markets. The operating results of this unit through
January 31, 2001 are reflected as a discontinued operation in our consolidated
financial statements.

Our consolidated financial statements as of and for the three and nine
months ended September 30, 2002 and 2001 have been prepared without audit
pursuant to the rules and regulations of the United States Securities and
Exchange Commission ("SEC"). In the opinion of management, the unaudited interim
consolidated financial statements that accompany these notes reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly our financial position as of September 30, 2002 and December 31,
2001, and the results of operations for the three and nine months ended
September 30, 2002 and 2001 and our cash flows for the nine months ended
September 30, 2002 and 2001. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC's rules and regulations relating to interim financial statements. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes included in our Annual Report on
Form 10-K for the year ended December 31, 2001.

As we have completed our transformation to a software business, we have
reclassified the statement of operations to present our results on a basis
comparable with other companies in the software industry. Reclassifications
include the systematic allocation of certain overhead expenses, such as
facilities, infrastructure and depreciation, from general and administrative to
other expense categories in the statement of operations based on the relative
benefits provided to each applicable business function. All prior period
information has been reclassified to conform with the current period's
presentation.

On July 15, 2002, the Company effected a 1-for-10 reverse stock split of
its common stock. All references to shares, share prices and per share amounts
have been adjusted for this reverse split.

Revenue Recognition

Revenues from software licensing and related services are accounted for
under Statement of Position (SOP) 97-2, "Software Revenue Recognition," and SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions," and related guidance in the form of technical questions
and answers published by the American Institute of Certified Public Accountants'
task force on software revenue recognition. SOP 97-2, as amended, requires
revenue earned on software arrangements involving multiple elements to be
allocated to each element based on vendor specific objective evidence of fair
values of the elements. License revenue allocated to software products is
recognized upon delivery of the software products or ratably over a contractual
period if unspecified software products are to be delivered during that period.
Revenue allocated to hosting and maintenance services is recognized ratably over
the

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VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contract term and revenue allocated to professional services is recognized as
the services are performed. For certain agreements where the professional
services provided are essential to the functionality of the software or are for
significant production, modification or customization of the software products,
both the software product revenue and service revenue are recognized on a
straight-line basis or in accordance with the provisions of SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts."

Adoption of New Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001. SFAS No. 141 also
specifies criteria that must be met for intangible assets acquired in a purchase
method business combination to be recognized and reported separately from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142, which became effective January 1,
2002, requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least annually
in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of." Accordingly, there has been
no amortization of goodwill since December 31, 2001. During the three months
ended September 30, 2002, we completed a goodwill impairment test as of
September 30, 2002 under SFAS No. 142. This test requires a comparison of the
fair value of a reporting unit with its carrying amount, including goodwill. For
purposes of this test, we did not consider the market capitalization of the
company, which consists of only one reporting unit, to be representative of its
fair value due to the volatility of the market price. Accordingly, we estimated
the fair value of the business based upon the amounts we could reasonably expect
to realize in the sale of the assets of the business. As a result of this test,
the Company recorded a goodwill impairment charge of approximately $27.5
million. Of this amount, approximately $21.5 million relates to the December 28,
2001 acquisition of Atlas Commerce, Inc. ("Atlas Commerce") and approximately
$6.0 million relates to the Company's acquisition of Isadra in August 1999.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No.
121, and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. SFAS No.
144 retains the fundamental provisions of SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS No. 121. For example, SFAS No. 144
provides guidance on how a long-lived asset that is used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived asset
that will be disposed of other than by sale. SFAS No. 144 retains the basic
provisions of APB Opinion No. 30 on how to present discontinued operations in
the income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). We adopted and implemented SFAS
No. 144 as of January 1, 2002 in conjunction with our accounting for our SMB
unit.

In November 2001, the FASB issued Topic D-103, "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses
Incurred." The FASB staff believes that reimbursements received for out-of-
pocket expenses incurred should be characterized as revenue in the income
statement. This guidance was to be applied in financial reporting periods
beginning after December 15, 2001 and comparative financial statements for prior
periods were to be reclassified to comply with the guidance. Accordingly, the
consolidated financial statements of operations have been reclassified pursuant
to this guidance.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
The rescission of SFAS No. 4, "Reporting Gains and Losses from

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VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Extinguishment of Debt," applies to a transaction entered into by our Company
for the quarter ended September 30, 2002. SFAS No. 4 required that gains and
losses from extinguishments of debt be included in the determination of net
income and be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. SFAS No. 145 is effective beginning January 1,
2003, however, the Company has elected to early adopt the provisions of SFAS No.
145. During the third quarter, in connection with the settlement of obligations
involving British Telecommunications Plc. ("BT"), the Company recognized a $4.8
million gain representing the difference between the fair value of the
consideration issued in the settlement transaction and the carrying value of the
amounts due BT. As a result of the early adoption of SFAS No. 145, the Company
evaluated the classification of this gain in accordance with the provisions of
APB Opinion No. 30 and determined that the gain does not meet the criteria for
classification as an extraordinary item. As a result, the gain has been included
in net interest expense and other within income from continuing operations in
the accompanying consolidated statements of operations for the three and nine
months ended September 30, 2002 (see Note 6 to the consolidated financial
statements).

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses the
financial accounting and reporting of expenses related to restructurings
initiated after 2002, and applies to costs associated with an exit activity
(including a restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plan facilities or personnel. Under SFAS
No. 146, a company will record a liability for a cost associated with an exit or
disposal activity when the liability is incurred and can be measured at fair
value. The provisions of this Statement are effective prospectively for exit or
disposal activities initiated after December 31, 2002. We have not determined
the impact of the adoption of this Statement on future periods.

(2) LIQUIDITY

During the first nine months of 2002, cash and cash equivalents declined by
$38.5 million, principally as a result of operating losses and the various
actions taken by the Company to restructure its balance sheet. Cash flows from
two significant customers, Microsoft and Converge, Inc. ("Converge"), were
instrumental in financing our business during 2001. As of December 31, 2001, the
Microsoft contractual arrangements have been terminated and anticipated cash
flows under the Converge contractual arrangements have been significantly
curtailed. For the nine months ended September 30, 2002, the Company received
cash payments from Converge totaling $10.5 million and expects to receive
approximately $0.2 million during the fourth quarter. Based on our most recent
projections, we believe that our current level of liquid assets and the expected
cash flows from contractual arrangements will be sufficient to finance our
operations and capital expenditures through March 31, 2003. Any projection of
our cash needs and cash flows beyond the next two quarters is inherently subject
to uncertainty.

We believe that under the current climate for the economy and the
technology sector, it will be extremely difficult for us to obtain additional
financing. Consequently, we are actively exploring alternatives to preserving
value for our creditors and shareholders, which may include a sale of all or
part of the Company or a reorganization or liquidation of the Company. We have
retained US Bancorp Piper Jaffray, an investment banker, to pursue a potential
sale of the Company. A sale, reorganization or liquidation of the Company could
result in the triggering of certain severance and third-party obligations, which
could be substantial.

If it would enhance our ability to sell all or part of the Company or
provide economic or other benefit in a reorganization or liquidation, we may
attempt to settle outstanding non-cancelable lease obligations and/or the
Company's outstanding convertible notes. If successful, our financial resources
and the related period during which the Company can expect to operate will be
reduced.

(3) DISCONTINUED OPERATIONS

On June 28, 2002, we completed the sale of the SMB unit to Vert Markets,
Inc., an affiliate of Corry Publishing, Inc. The SMB unit generated revenue from
e-enablement and e-commerce, as well as advertising and services. In
consideration for the transaction, we received cash of $2.35 million. In
addition, we may receive up to an additional
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VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$6.5 million based on a four-year performance-based earn-out provision. We
recorded a loss on disposal of approximately $0.2 million in the nine months
ended September 30, 2002 for the sale of the SMB unit.

The results of the SMB unit have been shown separately as a discontinued
operation and prior periods have been restated. The assets and liabilities of
the discontinued operation have been classified separately on the December 31,
2001 consolidated balance sheet. The assets held for sale as of December 31,
2001 also included certain assets that were not sold to Corry Publishing, Inc.,
but sold during the ordinary course of the SMB unit's operations.

Revenues and losses from this discontinued operation are as follows (also
refer to Note 14, Commitments and Contingencies, regarding the presentation of
revenue and expenses under certain transactions that are the subject of comments
received from the SEC in connection with a recent filing on Form S-3):

The assets and liabilities of the SMB unit as of December 31, 2001 are as
follows (in thousands):

Current assets.............................................. $ 5,368
Property and equipment, net................................. 4,525
Intangible assets........................................... 365
Other non-current assets.................................... 61
-------
Total assets................................................ $10,319
=======
Deferred revenue............................................ 20,102
Other liabilities........................................... 2,177
-------
Total liabilities........................................... $22,279
=======

Accounts receivable of approximately $0.5 million and current liabilities
of approximately $1.6 million of the SMB unit were reclassified during the
quarter ended June 30, 2002 out of assets and liabilities held for disposal, as
these assets and liabilities were not included in the sale of the SMB unit.

The income from discontinued operations for the three and nine months ended
September 30, 2002 includes $0, and $0.3 million in restructuring charges,
respectively. For the three and nine months ending September 30, 2001, the
income (loss) from discontinued operations includes $2.9 million and $61.5
million in restructuring charges, respectively.

Microsoft Relationship

On March 29, 2000, we entered into a commercial arrangement with Microsoft
(the "Original Microsoft Agreement"), which was terminated and replaced on April
26, 2001 (the "New Microsoft Agreement"). Collectively, under the Original and
New Microsoft Agreements, during the nine months ended September 30, 2002 we
recognized approximately $16.9 million in e-enablement and advertising revenue
and $0 of expense for advertising, software licensing and support. No revenue or
expense was recognized by the Company related to the Original and New Microsoft
Agreements during the three months ended September 30, 2002. For the three and
nine months ended September 30, 2001, we recognized approximately $17.2 million
and $45.7 million, respectively, in e-enablement and advertising revenue and $0
and $8.9 million, respectively, of expense for advertising, software licensing
and support. Revenues and expenses recognized under these agreements are
presented in income (loss) from operations of the SMB business.

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VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) INVESTMENTS

Available-For-Sale

As of September 30, 2002 and December 31, 2001, we have short-term
available-for-sale investments of approximately $1.9 million and $0,
respectively. This represents the net realizable value of our investment in
Converge based upon an agreement the Company entered into on September 30, 2002
(as discussed below in Cost Method and Other Investments). Our investment in
Ariba, Inc. ("Ariba") common stock of approximately $0.6 million at September
30, 2002 is included in prepaid expenses and other assets commensurate with a
forward sale agreement of our Ariba shares, which expires in June of 2003.
During the nine months ended September 30, 2001, we recognized an impairment
charge, included in net interest expense and other, of approximately $10.5
million on our Ariba investment for an other than temporary decline, based on
the difference between the original recorded cost of the investment and the fair
market value of the shares as of the forward sale contract date.

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

Cost Method and Other Investments

At September 30, 2002 and December 31, 2001, cost and equity method
investments were approximately $0.7 million and $10.8 million, respectively.

On September 30, 2002, the Company and its wholly-owned subsidiary, VNI
Holdings, Inc. ("VNI"), entered into an agreement with another investor of
Converge to sell all of the Company's equity interests in, and notes receivable
from, Converge for cash consideration of approximately $1.9 million. At the
first closing on September 30, 2002, VNI transferred the notes receivable and a
portion of the Converge equity to the buyer and received the entire $1.9 million
cash consideration. The cash received is recorded in the September 30, 2002 cash
and cash equivalents balance, with a corresponding liability shown on the
balance sheet as "obligation related to investment held for sale." The second
closing is expected to occur during the quarter ending December 31, 2002. Under
the terms of the agreement, at the second closing, the Company is expected to
transfer to the buyer all of the outstanding capital stock of VNI, which owns
all of the Company's remaining equity interest in Converge. If the Company is
not able to transfer the stock of VNI in accordance with the agreement, then the
buyer has the right to require VNI to transfer the remaining Converge equity
interests to the buyer and the Company will be required to refund approximately
$0.1 million of cash consideration to the buyer.

In connection with the agreement to sell the investment, the Company
recorded an impairment charge of $5.7 million in the three months ended
September 30, 2002 to write-down the investment to net realizable value. For the
nine months ended September 30, 2002, we recorded impairment charges of $9.5
million related to our total Converge investment, which includes the $3.5
million invested by the Company during February 2002 (see the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 2002 for additional
information). These impairment charges are included in net interest expense and
other. The Converge investment was valued at $7.8 million at December 31, 2001.
At September 30, 2002, the carrying value of the Converge investment of $1.9
million is reflected as an investment held for

12

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sale. During the three and nine months ended September 30, 2001, we recorded an
impairment charge of $195.4 million to our Converge investment, based upon an
independent valuation.

During the three months and nine months ended September 30, 2002, we
recorded additional impairment charges of approximately $0.5 million and $1.9
million, respectively, for other than temporary declines in the fair values of
our other cost method investments. These impairment charges are included in net
interest expense and other. During the three and nine months ended September 30,
2001, we recorded impairment charges of approximately $1.2 million and $10.8
million respectively, which are included in net interest expense and other, for
other than temporary declines in the fair values of our other cost method
investments. Additionally, for our equity method investments, we recorded
impairment charges of approximately $1.1 million and $1.8 million for the three
and nine months ended September 30, 2001, respectively.

During the three and nine months ended September 30, 2002, we sold a cost
method investment for proceeds of approximately $0.2 million. The realized gain
of approximately $35,000 is included in net interest expense and other.

(5) GOODWILL AND OTHER INTANGIBLES

We adopted SFAS No. 142 effective January 1, 2002. Under SFAS No. 142,
goodwill is no longer amortized but is reviewed for impairment annually, or more
frequently if certain indicators arise. In addition, the Statement requires
reassessment of the useful lives of previously recognized intangible assets.
With the adoption of the Statement, we ceased amortization of goodwill as of
January 1, 2002. The following table provides a reconciliation of reported
income (loss) attributable to common shareholders for the three and nine months
ended September 30, 2002 and 2001 to the adjusted loss attributable to common
shareholders excluding amortization expense relating to goodwill and assembled
workforce:

We performed a goodwill impairment test as of September 30, 2002 under SFAS
No. 142. This test requires a comparison of the fair value of a reporting unit
with its carrying amount, including goodwill. For purposes of this test, we did
not consider the market capitalization of the Company, which consists of only
one reporting unit, to be representative of its fair value due to the volatility
of the market price. Accordingly, we estimated the fair value of the business
based upon the amounts we could reasonably expect to realize from the sale of
the assets of the business. As a result of this test,

13

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company recorded a goodwill impairment charge of approximately $27.5
million. Of this amount, approximately $21.5 million relates to the December 28,
2001 acquisition of Atlas Commerce and approximately $6.0 million relates to the
Company's acquisition of Isadra in August 1999.

The following table reflects the components of amortizable intangible
assets:

The carrying amount of goodwill at September 30, 2002 is $0. For the three
and nine months ended September 30, 2002, amortization expense on intangible
assets, excluding goodwill and warrant amortization, was $0.2 million and $0.8
million, respectively. During the three and nine months ended September 30,
2001, we recognized $0.6 million and $2.5 million, respectively, in amortization
expense on intangible assets, excluding goodwill.

The following sets forth the estimated remaining amortization expense on
intangible assets for the fiscal years ending in December 31:

(6) OTHER CURRENT LIABILITIES

On September 12, 2002, we completed the repurchase of the remaining 10%
interest in Verticalnet Europe, B.V. that we did not own (the "BV Shares"), for
consideration of $6.5 million in cash and 1,000,000 shares of Verticalnet common
stock valued at $1.2 million (200,000 shares were previously issued and $3.0
million in cash was previously paid in 2002 as partial payments toward the
obligation). In connection with this settlement, the put and call agreement
between Verticalnet and BT was terminated, as well as BT's put right under this
agreement that would have required us to repurchase the BV Shares. Separately,
the Company and BT also agreed to terminate a Reseller Agreement between the
parties, including a $1.5 million prepaid license obligation that is included in
current liabilities on the consolidated balance sheet as of December 31, 2001.
As a result of this settlement, the Company recorded a $4.8 million gain
representing the difference between the fair value of the consideration issued
in the settlement transaction and the carrying value of the amounts due BT. The
gain is included in net interest expense and other in the consolidated income
statement for the three and nine months ended September 30, 2002. At December
31, 2001, the fair value of the put and call liability was approximately $13.6
million and is included in other current liabilities on the consolidated balance
sheet.

(7) STRATEGIC RELATIONSHIP

The Company and Converge entered into a first amendment to the amended and
restated subscription license agreement and a first amendment to the maintenance
and support agreement, both as of February 1, 2002. As a result of these
amendments, the term of each agreement was extended to December 31, 2003. As of
May 2002, all license payments have been received and the remaining deferred
license revenue will be recognized on a straight-line basis through December
2003. The amendment to the maintenance agreement reduced our required level of
service, accelerated the payment terms and reduced Converge's aggregate
obligation by $0.5 million. The expected contractual

14

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

maintenance payments under the new agreements plus the remaining deferred
revenue under the original agreements were to be recognized on a straight-line
basis through December 2003. From January 1, 2002 through September 30, 2002, we
have received approximately $10.4 million from Converge for license fees and
maintenance services. In August 2002, Converge notified the Company that they
would not be paying the remaining maintenance amounts through December 2002
according to the first amendment to the maintenance and support agreement. They
proposed an amended payment schedule that extended the payments terms through
October 2006 for the remaining $1.8 million due. We believe a significant risk
exists related to the remaining $1.8 million due through December 31, 2002 under
the existing agreements. Therefore, due to the risk of non-collection of all or
a portion of the remaining amounts due, the Company is recognizing maintenance
revenue from the Converge contract on a cash basis beginning in August 2002. To
the extent that all or a portion of the $1.8 million is not collected, revenue
recognized through December 31, 2003 will be adversely affected by such
shortfall. However, as amounts through May 2002 under this agreement were
recorded as deferred revenue when invoiced, the Company does not expect to
recognize any asset impairments associated with non-collection of all or a
portion of the amounts due. Additionally, effective August 2002, the monthly
maintenance amounts billed, net of any related collections, are fully reserved
in the allowance for doubtful accounts.

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

During the three and nine months ended September 30, 2002, we recognized
revenues of approximately $4.1 million, and $13.7 million, respectively, under
the Converge agreements. For the three and nine months ended September 30, 2001,
revenues of approximately $9.0 million and $23.7 million, respectively, were
recognized under the Converge agreements. Deferred revenue related to the
Converge agreements is approximately $20.5 million at September 30, 2002.

See Note 16 to the consolidated financial statements regarding the
subsequent amendment to the Converge license agreement.

(8) RESTRUCTURING CHARGES AND ASSET WRITE-DOWN

During the year ended December 31, 2001, we announced and implemented
several strategic and organizational initiatives designed to realign business
operations, eliminate acquisition related redundancies and reduce costs. As a
result of these restructuring initiatives we recorded a separate restructuring
and asset impairment charge in each of the four quarters of 2001. The aggregate
remaining restructuring accrual at September 30, 2002 of approximately $5.6
million, included in accrued expenses on the consolidated balance sheet, is
expected to be adequate to cover actual amounts to be paid. Differences, if any,
between the estimated amounts accrued and the actual amounts paid will be
reflected in operating expenses in future periods.

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VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table provides a summary by category and a rollforward of the
changes in the restructuring accrual for the nine months ended September 30,
2002:

During the three and nine months ended September 30, 2002, we recorded
adjustments of approximately $1.4 million and $2.8 million, respectively,
related to lease termination costs and $0 and $0.6 million, respectively,
related to employee termination benefits and other exit costs, due to changes in
estimates. For the three and nine months ended September 30, 2002, these
adjustments included $0 and $0.2 million, respectively, of lease termination
costs reflected in income (loss) from discontinued operations. During the three
and nine months ended September 30, 2002, the remaining $1.4 million and $3.2
million, respectively, of expenses are recorded in restructuring and asset
impairment charges in the consolidated statements of operations.

The amount accrued at September 30, 2002 for lease termination costs
relates to three leases for office facilities and one capital lease for excess
equipment that have not yet been terminated. The accrual represents the amount
required to fulfill our obligation under signed lease contracts, the net expense
expected to be incurred to sublet the facilities, or the estimated amounts to be
paid to terminate the lease contracts before the end of their terms.

The amount accrued at September 30, 2002 for employee severance and related
benefits relates to severance payments which have not yet been made to employees
whose positions were eliminated as part of the reductions in workforce.

During the three and nine months ended September 30, 2001, we recorded
restructuring and asset impairment charges of approximately $15.0 million and
$241.4 million, respectively. For the three months ended September 30, 2001,
this charge related to lease termination costs, employee termination benefits,
asset disposals, and other exit costs. For the nine months ended September 30,
2001, this charge included an impairment of $202.1 million of identifiable
assets and goodwill in accordance with SFAS No. 121, and $39.3 million for lease
termination costs, employee termination benefits, and asset disposals. For the
three and nine month periods ended September 30, 2001, these charges included
$12.1 million and $179.8 million, respectively, in restructuring and asset
impairment charges in loss from continuing operations, and $2.9 million and
$61.6 million, respectively, included in loss from discontinued operations of
the SMB unit.

(9) PREFERRED STOCK

On June 28, 2002, we completed the repurchase of all of our outstanding
shares of Series A 6.00% convertible redeemable preferred stock due 2010, plus
accrued dividends thereon, for a purchase price of $5.0 million, and agreed to
the cancellation of a common stock purchase warrant, dated April 7, 2000. The
difference between the carrying amount and the amount paid in the repurchase of
approximately $101.0 million is recorded in additional paid in capital and
included in income attributable to common shareholders for the nine months ended
September 30, 2002.

(10) REVERSE STOCK SPLIT

On July 1, 2002 the Company announced that its Board of Directors had
approved a 1-for-10 reverse stock split effective with the commencement of
trading on July 15, 2002. Previously, on June 5, 2002, the Company's
shareholders authorized the Board of Directors to effect a reverse stock split
in the range of 1:5 to 1:10, with the specific exchange rate to be determined at
the discretion of the Board of Directors.

16

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) PUT LIABILITY

On August 1, 2002, the Company completed the repurchase of 235,981 shares
of common stock from former holders of Atlas Commerce common shares under the
terms of a put agreement. The put was entered into in connection with the
acquisition of Atlas Commerce on December 28, 2001. The aggregate purchase price
for the put shares was $1.0 million. These shares were retired upon repurchase.
The effect of this transaction and the expiration of the put terms for the
unexercised portion are reflected in the consolidated balance sheet as of
September 30, 2002.

(12) REPURCHASE OF CONVERTIBLE DEBENTURES

On July 30, 2002, we completed the repurchase of $13.85 million of our
5 1/4% convertible subordinated debentures due September 2004 for total
consideration of $2.9 million. This consideration included $0.8 million, or
1,270,854 shares, in common stock consideration, and $2.1 million in cash
consideration. Additionally, we made a payment for accrued but unpaid interest
of $0.3 million, also in cash. In connection with the transaction, we recognized
a charge of $0.2 million for deferred debt offering costs attributable to the
portion of debt repurchased. The Company also recorded a charge to operations of
$2.9 million representing an inducement for conversion of the convertible
debentures, in accordance with SFAS No. 84, "Induced Conversions of Convertible
Debt." This charge is included in net interest expense and other in the
consolidated statement of operations for the three and nine-month periods ended
September 30, 2002. The net effect on shareholders' equity was an increase of
$11.5 million.

This transaction was completed, under the same terms and conditions, with
two separate bondholders -- one, a third party unaffiliated bondholder, and the
other, a subsidiary of a principal shareholder of the company -- Internet
Capital Group.

(13) INCOME (LOSS) PER SHARE

All share and per share amounts in these financial statements give
retroactive effect to the 1-for-10 reverse stock split which became effective on
July 15, 2002. Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed using the weighted average number of common
and dilutive potential common shares outstanding during the period, including
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method) and the conversion of our 5 1/4%
convertible subordinated debentures and our Series A 6.00% convertible
redeemable preferred stock (using the if-converted method). Potential common
shares are excluded from the calculation if their effect is anti-dilutive.

17

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the computation of net income (loss) per
common share:

(14) COMMITMENTS AND CONTINGENCIES

We have entered into non-cancelable obligations with service providers.
Under these agreements, our remaining commitments for the fiscal years ending
December 31 are as follows (in thousands):

2002........................................................ $89
2003........................................................ 50

Future minimum lease payments remaining under our facility leases for the
fiscal years ending December 31 are as follows (in thousands):

2002........................................................ $ 687
2003........................................................ 2,725
2004........................................................ 2,565
2005........................................................ 2,002
2006........................................................ 1,655
Thereafter.................................................. 3,597

These future minimum lease payments include all facility leases for which
we are contractually committed to make payments. We are in the process of
negotiating sublease arrangements and/or terminations of certain facility
leases, which

18

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

represent approximately $11.1 million of these obligations. We currently
estimate the remaining termination costs of these leases, along with one capital
lease, to be approximately $5.8 million, which are included in accrued expenses.

In connection with our acquisition of Atlas Commerce, we filed a
registration statement on Form S-3 with the SEC registering the resale of shares
of our common stock issued to acquire Atlas Commerce. In connection with a
routine review and comment letter process related to this filing, we have
received comments from the SEC. The remaining open comments relate primarily to
the presentation and recognition of certain previously reported revenue and
expense items of our SMB business and whether one element of a material
agreement should be accounted for as "barter" in accordance with EITF No. 99-17,
"Accounting for Advertising Barter Transactions." During the nine-month periods
ended September 30, 2002 and 2001, we recognized advertising revenues under the
subject agreement of $0 and $5.0 million, respectively. During the same periods,
we recognized advertising expenses of $0 and $7.8 million, respectively. From
inception of the agreement through completion, we recorded advertising revenues
of $22.2 million and advertising expenses of $19.3 million. We believe the
ultimate resolution of such comments would not change our accumulated deficit at
September 30, 2002, although there could be differences in reported quarterly
operating results. For the nine-month periods ended September 30, 2002 and 2001,
these differences are estimated to be $0 and a reduction of net reported expense
of $5.7 million, respectively. The consolidated balance sheets as of September
30, 2002 and December 31, 2001 do not include any assets or liabilities
associated with advertising activities under the subject agreement. We further
believe that the cash flows from operations for the nine-month periods ended
September 30, 2002 and 2001 would be unaffected by any potential change in
presentation.

Additionally, there were certain other "barter" transactions recognized by
the Company in accordance with EITF No. 99-17 which could be impacted by the
comments provided by the SEC as noted above. The Company is currently evaluating
the impact that a change in presentation would have should such change be
required. We believe that any change in presentation or recognition of revenues
and expenses for these transactions would not result in a change to our
accumulated deficit at September 30, 2002.

During February 2002, the Company announced its intention to sell its SMB
unit. Accordingly, that business unit is reflected in our financial statements
as a discontinued operation for all periods presented. Such presentation
requires that all elements of revenue and expense of the SMB unit be netted as a
single line item to report net results of discontinued operations. As a result,
we believe that any potential change in the presentation or recognition of
revenues and expenses under "barter" arrangements would have an immaterial
effect on the presentation of our statements of operations. The SMB unit was
sold on June 28, 2002.

On October 19, 2002, the Company filed its response to the matters raised
by the SEC and is awaiting response from the SEC. We are currently in the
process of resolving these matters with the SEC and believe the historical
classifications of revenue and expense for the SMB unit are appropriate. As of
the date of this filing, we cannot provide assurance, however, that the SEC will
declare the Form S-3 effective without us first amending the reports that are
incorporated into the Form S-3. The remaining open SEC comments do not relate in
any way to our ongoing collaborative supply chain software operations.

(15) LITIGATION

On June 12, 2001, a class action lawsuit was filed against us and several
of our officers and directors in U.S. Federal Court for the Southern District of
New York in an action captioned CJA Acquisition, Inc. v. Verticalnet, et al.,
C.A. No. 01-CV-5241 (the "CJA Action"). Also named as defendants were four
underwriters involved in the initial public offering of our common stock in
February 1999 -- Lehman Brothers Inc., Hambrecht & Quist LLC, Volpe Brown Whelan
& Company LLC and WIT Capital Corporation. The complaint in the CJA Action
alleges violations of Sections 11 and 15 of the Securities Act of 1933 and
Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, based on, among other things, claims that the four underwriters
awarded material portions of the initial shares to certain favored customers in
exchange for excessive commissions. The plaintiff also asserts that the
underwriters engaged in a practice known as "laddering," whereby the clients or
customers agreed that in exchange for IPO shares they would purchase additional
shares at progressively higher prices after the IPO. With respect
19

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to Verticalnet, the complaint alleges that the company and its officers and
directors failed to disclose in the prospectus and the registration statement
the existence of these purported excessive commissions and laddering agreements.
After the CJA Action was filed, several "copycat" complaints were filed in U.S.
Federal Court for the Southern District of New York. Those complaints, whose
allegations mirror those found in the CJA Action, include Ezra Charitable Trust
v. Verticalnet, et al., C.A. No. 01-CV-5350; Kofsky v. Verticalnet, et al., C.A.
No. 01-CV-5628; Reeberg v. Verticalnet, C.A. No. 01-CV-5730; Lee v. Verticalnet,
et al., C.A. No. 01-CV-7385; Hoang v. Verticalnet, et al., C.A. No. 01-CV-6864;
Morris v. Verticalnet, et al., C.A. No. 01-CV-9459, and Murphy v. Verticalnet,
et al., C.A. No. 01-CV-8084. None of the complaints state the amount of any
damages being sought, but do ask the court to award "rescissory damages." All of
the foregoing suits were amended and consolidated into a single complaint that
was filed with the U.S. Federal Court on April 19, 2002. This amended complaint
contains additional factual allegations concerning the events discussed in the
original complaints, and asserts that, in addition to Sections 11 and 15 of the
Securities Act, the Company and our officers and directors also violated
Sections 10(b), 20(a) and Rule 10b-5 of the Exchange Act in connection with the
IPO. In addition to this amended and consolidated complaint, the plaintiffs in
this lawsuit and in the hundreds of other similar suits filed against other
companies in connection with IPOs that occurred in the late 1990s have filed
"master allegations" that primarily focus on the conduct of the underwriters of
the IPOs, including our IPO. On October 9, 2002, the U.S. Federal Court for the
Southern District of New York entered an order dismissing, without prejudice,
the claims against the individual Verticalnet officers and directors who had
been named as defendants in the various complaints. We have retained counsel and
intend to vigorously defend ourselves in connection with the allegations raised
in the amended and consolidated complaint. In addition, we intend to enforce our
indemnity rights with respect to the underwriters who are also named as
defendants in the amended and consolidated complaint.

On December 4, 2001, a lawsuit was filed against us in the Montgomery
County (Pa.) Court of Common Pleas in an action captioned Belcher-Pregmon
Commercial Real Estate Co. v. Verticalnet, C.A. No. 01-22968. The suit alleges
that the plaintiff is entitled to a broker commission in excess of $0.4 million
in connection with our former lease of a building in Horsham, Pa. We have
retained counsel to defend against the lawsuit. Our motion to dismiss the
lawsuit outright was denied, and we have filed an answer to the complaint, along
with affirmative defenses and a counterclaim against the plaintiff.

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

(16) SUBSEQUENT EVENTS

In October 2002, we retained US Bancorp Piper Jaffray, an investment
banker, to pursue the potential sale of the Company.

On November 4, 2002, the Company entered into a second amendment to the
amended and restated subscription license agreement with Converge. This
amendment eliminates the obligation of the Company to provide future Verticalnet
products to Converge at no cost for the term of the agreement. As there remains
no further obligations by Verticalnet under the license agreement with Converge,
the deferred license revenue balance of $19.6 million as of September 30, 2002,
will be recognized during the fourth quarter of 2002. As all amounts due under
the amended and restated subscription license agreement had been collected, the
revenue recognized would not represent additional cash inflows to the Company.
This amendment did not alter the maintenance and support agreement between the
Company and Converge. The pro forma balance sheet as of September 30, 2002 gives
effect to the recognition of the deferred revenue related to the Converge
license fee.

20

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

FORWARD-LOOKING STATEMENTS

The information in this report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Any
statements contained in this report that are not statements of historical fact
may be deemed forward-looking statements. Words such as "may," "might," "will,"
"would," "should," "could," "project," "estimate," "pro forma," "predict,"
"potential," "strategy," "anticipate," "plan to," "believe," "continue,"
"intend," "expect" and words of similar expression (including the negative of
any of the foregoing) are intended to identify forward-looking statements.
Additionally, forward-looking statements in this report include statements
relating to the design, development and implementation of our products; the
strategies underlying our business objectives; the benefits to our customers and
their trading partners of our products; our liquidity and capital resources; and
the impact of our acquisitions and investments on our business, financial
condition and operating results.

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

OVERVIEW

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

With this transformation, the presentation of our consolidated statements
of operations has been modified. Most significantly, the operations of the SMB
unit have been classified as discontinued operations in all periods presented.
Also, the classification of our revenues and costs of revenues and expenses have
changed, and certain overhead expenses previously categorized as general and
administrative expenses have been allocated to the business functions receiving
the benefits attributable to such expenses. These changes to the presentation of
the statement of operations were made for all periods presented. We believe
these changes will provide more clarity into the ongoing operations, and present
a more traditional view of software companies' statements of operations.

Significant management actions were taken since the beginning of 2001 to
complete the transformation from an operator of on-line public vertical
communities to an enterprise software company. These actions are itemized below:

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

21

significantly reduced staffing requirements in stages. We, therefore,
completed four major restructuring efforts to reduce costs and streamline
operations;

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

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

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

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

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

- On February 13, 2002, we announced our intention to sell the SMB unit,
which we completed in June 2002. Our board of directors authorized this
action to complete our strategic realignment to an enterprise software
business. Beginning in the first quarter of 2002, we have reported the
SMB unit as a discontinued operation;

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

- On June 28, 2002, we completed the sale of certain of the assets of the
SMB unit to Corry Publishing for $2.35 million in cash consideration,
plus up to an additional $6.5 million as an earn-out over the four-year
period after the closing date. Additionally, during the quarter ended
June 30, 2002, other assets in the SMB unit were sold under a separate
agreement. Together, the transactions substantially finalized the
operations of the SMB unit as part of Verticalnet, Inc.; and

- Also on June 28, 2002, the Company completed the repurchase of all of its
outstanding shares of Series A 6.00% convertible redeemable preferred
stock due 2010, plus accrued dividends thereon, for a purchase price of
$5.0 million, and agreed to the cancellation of a common stock purchase
warrant, dated April 7, 2000. The effect of the transaction was a net
increase to shareholders' equity of $101.0 million.

With our transformation to an enterprise software business model complete,
management has taken other significant actions since the second quarter of 2002
to restructure our balance sheet and improve the financial viability of our
business:

- On July 1, 2002 the Company announced that its Board of Directors had
approved a 1-for-10 reverse stock split effective with the commencement
of trading on July 15, 2002. Previously, on June 5, 2002, the Company's
shareholders authorized the Board of Directors to effect a reverse stock
split in the range of 1:5 to 1:10, with the specific exchange rate to be
determined at the discretion of the Board of Directors.

- On July 30, 2002, we completed the repurchase of $13.85 million of its
5 1/4% convertible subordinated debentures due September 2004 for total
consideration of $2.9 million. This consideration included $0.8 million,
or 1,270,854 shares, in common stock consideration, and $2.1 million in
cash consideration. Additionally, we made a payment for accrued but
unpaid interest of $0.3 million, also in cash. In connection with the
transaction, we also recognized a charge of $0.2 million for deferred
debt offering costs attributable to the portion of debt repurchased. In
connection with the repurchase, the Company also recorded a charge to
operations of $2.9 million representing an inducement for conversion of
the convertible debentures, in accordance with SFAS No. 84, "Induced
Conversions of Convertible Debt." The net effect on shareholders' equity
was an increase of $11.5 million.

- On August 1, 2002, the Company completed the repurchase of 235,981 shares
of common stock from former holders of Atlas Commerce common shares under
the terms of a put that they had the right to exercise through

22

July 29, 2002. The put was entered into in connection with the
acquisition of Atlas Commerce on December 28, 2001. The aggregate
purchase price for the put shares was $1.0 million.

- On September 12, 2002, we completed the repurchase of the remaining 10%
interest in Verticalnet Europe, B.V. that we did not own (the "BV
Shares"), for consideration of $6.5 million in cash and 1,000,000 shares
of common stock valued at $1.2 million (200,000 shares were previously
issued in 2002 as partial payments toward the obligation, along with an
additional $3.0 million payment). In connection with this settlement, the
put and call agreement between Verticalnet and British Telecommunications
Plc. ("BT) was terminated, as well as BT's put right under this agreement
that would have required us to repurchase the BV Shares. Separately, the
Company and BT also agreed to terminate a Reseller Agreement between the
parties, including a $1.5 million prepaid license obligation that is
included in current liabilities on the consolidated balance sheet as of
December 31, 2001. As a result of this settlement, the Company recorded a
$4.8 million gain representing the difference between the fair value of
the consideration issued in the settlement transaction and the carrying
value of the amounts due BT.

- On September 30, 2002, the Company and its wholly-owned subsidiary, VNI
Holdings, Inc. ("VNI") entered into an agreement with another investor in
Converge to sell all of the Company's equity interests in, and notes
receivable from, Converge for cash consideration of approximately $1.9
million. At the first closing on September 30, 2002, VNI transferred the
notes receivable and a portion of the Converge equity to the buyer and
received the entire $1.9 million cash consideration. The second closing
is expected to occur during the quarter ending December 31, 2002. Under
the terms of the agreement, at the second closing, the Company is
expected to transfer to the buyer all of the outstanding capital stock of
VNI, which owns all of the Company's remaining equity interest in
Converge. If the Company is not able to transfer the stock of VNI in
accordance with the agreement, then the buyer has the right to require
VNI to transfer the remaining Converge equity interests to the buyer and
the Company will be required to refund approximately $0.1 million of cash
consideration to the buyer.

- During the three months ended September 30, 2002, we completed a goodwill
impairment test as of September 30, 2002, under SFAS No. 142. This test
requires a comparison of the fair value of a reporting unit with its
carrying amount, including goodwill. We did not consider the market
capitalization of the Company, which consists of only one reporting unit,
to be representative of its fair value due to the volatility of the
market price. Therefore, we estimated the fair value of the business
based upon the amounts we could reasonably expect to realize in the sale
of the assets of the business. As a result of this test, the Company
recorded an impairment charge to goodwill of $27.5 million. Of this
amount, approximately $21.5 million relates to the December 28, 2001
acquisition of Atlas Commerce and approximately $6.0 million relates to
the Company's acquisition of Isadra in August 1999.

- In October 2002, we retained US Bancorp Piper Jaffray, an investment
banker, to pursue the potential sale of the Company.

- On November 4, 2002, the Company entered into a second amendment to the
amended and restated subscription license agreement with Converge. This
amendment eliminates the obligation of the Company to provide future
Verticalnet products to Converge at no cost for the term of the
agreement. As there remains no further obligation by Verticalnet under
the license agreement with Converge, the deferred license revenue balance
of $19.6 million as of September 30, 2002, will be recognized during the
fourth quarter of 2002. As all amounts due under the amended and restated
subscription license agreement had been collected, the revenue recognized
would not represent additional cash inflows to the Company. This
amendment did not alter the maintenance and support agreement between the
Company and Converge.

REVENUE RECOGNITION

Through September 30, 2002, our software licensing and related services
revenues have been principally derived from one customer, Converge. The original
arrangement with Converge entailed a right to use our existing software as well
as any future software that we developed, the provision of professional
services, and maintenance and support services over the life of the agreements.
Due to the type of professional services that we were providing to Converge, as
well as the fact that Converge was entitled to use, free of charge, any of our
future software products, revenue related to Converge was being recognized on a
straight-line basis over the term of the arrangements. However, as of November
5, 2002, the amended and restated subscription license agreement has been
amended to relieve the Company of any obligation to

23

provide future software products. As such, the remaining deferred license fees
will be recognized during the fourth quarter of 2002 (see Note 16 to the
consolidated financial statements).

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

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

We recognize revenue in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions." We
recognize revenue when all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery of the product has occurred; the fee
is fixed or determinable; and collectibility is probable. We consider all
arrangements with payment terms extending beyond one year to not be fixed or
determinable, and revenue under these agreements is recognized as payments
become due from the customer. If collectibility is not considered probable,
revenue is recognized when the fee is collected.

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

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

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

Deferred revenue includes amounts received from customers for which revenue
has not been recognized, which in most cases relates to maintenance or license
fees that are deferred until they can be recognized. The majority of our
deferred revenue at September 30, 2002 is related to license fee payments
received from Converge. Such amounts were to be recognized as revenue on a
straight-line basis over the contract term, which ends December 31, 2003. This
revenue comprises the majority of our revenue for 2002. See Note 16 to the
consolidated financial statements regarding the subsequent amendment to the
Converge license agreement.

24

RESULTS OF CONTINUING OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001

The following discussion and comparison regarding results of continuing
operations do not include the results of the SMB unit or the Verticalnet
Exchanges unit. The discussion also follows the new presentation of the
consolidated statements of operations.

Revenues in the ongoing business are comprised of software license revenue
and services and maintenance revenue. For the three-month periods ended
September 30, 2002 and 2001, software license revenue was $4.4 million versus
$6.4 million, respectively. For the nine-month periods ended September 30, 2002
and 2001, software license revenue was $15.3 million and $19.3 million,
respectively. The declines in both the three and nine-month periods are
primarily due to the February 2002 restructuring of the Converge license
agreement, as well as a more difficult macro economic market for software. The
Company has not executed a software license agreement since March 2002. Services
and maintenance revenues were $2.2 million in the third quarter of 2002 as
compared to $3.3 million in the same period last year. For the nine-month
periods ended September 30, 2002 and 2001, services and maintenance revenue were
$5.5 million and $9.5 million, respectively. The significant decline in services
and maintenance revenue is due primarily to the restructured Converge agreement,
partially offset by service revenues generated principally from new customers
acquired during the first quarter of 2002.

The cost of revenue is comprised of the cost of software and the cost of
services and maintenance. The cost of software itself is comprised of the cost
of licenses, which primarily represents royalties, and the cost of acquired
technology, which is the non-cash amortization of currently used technologies
acquired through acquisitions. The cost of software decreased approximately $0.8
million from the third quarter of 2001 to the third quarter of 2002. For the
nine-month periods ended September 30, 2002 and 2001, the cost of software
decreased approximately $2.7 million. These decreases for both the three and
nine-month periods were due primarily to the decrease in the amortization of the
technology acquired in the Isadra and Tradeum acquisitions which, as of December
31, 2001, had been fully amortized. The cost of acquired technology in 2002
relates to the Atlas Commerce acquisition which occurred in December 2001.

The cost of services and maintenance includes the cost of the Company's
consultants who are primarily responsible for the software implementations and
configurations. Also included is the cost of the Company's customer support
function, which is provided to customers as part of the recurring maintenance
fees. These costs decreased from approximately $5.0 million to $1.3 million in
the quarters ended September 30, 2001 and 2002, respectively, and from
approximately $19.9 million to $4.2 million for the nine-month periods ended
September 30, 2001 and 2002, respectively. The decreases relate substantially to
reduced third-party consulting costs and a significant reduction in headcount as
a result of the restructuring actions taken during 2001. The combination of
these costs accounted for approximately $1.7 million and $9.6 million,
respectively, of the decreases for the three and nine-month periods ended
September 30, 2002 as compared to the same periods in 2001. Also related to the
headcount reductions, travel and entertainment expenses declined approximately
$0.1 million and $1.5 million, respectively, in the three and nine-month periods
ended September 30, 2002 as compared to the same periods in 2001. In addition,
the facilities and infrastructure costs attributable to the consulting and
support group functions decreased approximately $0.6 million and $2.3 million,
respectively, for the three and nine-month periods ended September 30, 2002 as
compared to the same periods in 2001, also largely due to the restructuring
charges incurred throughout 2001.

Research and development costs consist primarily of salaries and fringe
benefits costs of our product strategy, development, and testing employees. The
research and development costs decreased from approximately $7.9 million in the
third quarter of 2001 to approximately $1.5 million in the third quarter of 2002
primarily due to headcount reductions associated with the restructuring actions
taken during 2001 and to a lesser extent in the first half of 2002. For the
nine-month periods ended September 30, 2001 and 2002, research and development
costs decreased from approximately $20.9 million to approximately $7.9 million,
respectively. Salary and fringe related costs accounted for the majority of the
decreases, approximately $3.5 million and $6.4 million, respectively, for the
three and nine-month periods ended September 30, 2002 as compared to the same
periods in 2001. In addition, third-party consulting costs decreased
approximately $1.3 million and $2.6 million, respectively, for the three and
nine-month periods ended September 30, 2002 as compared to the same periods in
2001. Facilities and infrastructure costs attributable to the research and
development group contributed approximately $1.6 million and $3.4 million,
respectively, to the overall decrease for the three and nine-month periods ended
September 30, 2002 as compared to the same periods in 2001.

25

Sales and marketing expenses consist primarily of salaries and fringe
benefits costs, as well as commissions for sales and marketing employees and
related travel expenses. The sales and marketing expenses for the three-month
periods ended September 30, 2002 and 2001 were approximately $1.5 million and
$5.0 million, respectively. The sales and marketing expenses for the nine-month
periods ended September 30, 2002 and 2001 were $4.7 million and $16.3 million,
respectively. The significant decreases in sales and marketing expenses are
primarily headcount related, as salary and fringe reductions amounted to
approximately $1.8 million for the three-month period ended September 30, 2002
as compared to the same period in 2001, while the reduction was approximately
$5.0 million between the nine-month periods ended September 30, 2002 and 2001.
In addition, travel related expenses declined $0.3 million and $1.7 million
between the comparable three and nine-month periods ended September 30, 2002 and
2001, respectively. Direct marketing expenses such as advertising, public
relations and trade shows declined approximately $0.6 million and $1.8 million
between the comparable three and nine-month periods ended September 30, 2002 and
2001, respectively.

General and administrative expenses consist primarily of salaries and
related costs for our executive, administrative, finance, legal and human
resources personnel. General and administrative expenses were approximately $1.3
million in the quarter ended September 30, 2002 as compared to $6.1 million in
the third quarter of 2001. For the nine months ended September 30, 2002, general
and administrative expenses were $7.5 million as compared to $20.9 million for
the nine months ended September 30, 2001. These expenses declined primarily as a
result of the restructuring charges incurred in 2001. Headcount related cost
reductions accounted for approximately $2.7 million and $7.7 million of the
decrease between the three and nine-month periods ended September 30, 2002 and
2001, respectively. Professional services expenses declined approximately $1.9
million and $4.2 million, respectively, between the comparable three and
nine-month periods ended September 30, 2002 and 2001. General and administrative
facilities and infrastructure related reductions accounted for approximately
$2.6 million and $4.4 million of the decline, respectively, between the
comparable quarterly and nine-month periods ended September 30, 2002 and 2001.
During the three months ended September 30, 2002, we settled certain litigation
and tax related issues for which accruals had been established. The settlement
of these items resulted in a reduction of general and administrative expenses
during the quarter of $0.9 million, also contributing to the decreases for both
the three and nine-month periods. These are one-time reductions, and are not
part of the operating cost structure.

Restructuring and asset impairment charges for the third quarter and nine
months ended September 30, 2002 of $28.9 million and $30.7 million,
respectively, include a goodwill impairment charge of approximately $27.5
million related to the goodwill recorded in the acquisitions of Atlas Commerce
and Isadra. The remaining charges include adjustments to the restructuring
charge recognized in the fourth quarter of 2001. The $1.4 million and $3.2
million adjustments for the quarter and nine months ended September 30, 2002,
respectively, relate primarily to facility leases, and in the nine-month period
include $0.6 million related to severance costs incurred as a result of the
Atlas Commerce acquisition and integration. The lease adjustments are indicative
of the difficult sublet market that exists for office space in certain markets
where the Company currently leases office space. We are actively pursuing
settlements of lease obligations for the excess office space. For the three and
nine months ended September 30, 2001, restructuring and asset impairment charges
totaled $12.1 million and $179.8 million, respectively. For the nine months
ended September 30, 2001, this charge includes approximately $155.0 million for
a goodwill impairment charge related to the Tradeum acquisition. The remainder
of the 2001 charges related primarily to lease termination, severance costs and
asset disposals.

Amortization of intangibles for the third quarter and nine months ended
September 30, 2002 totaled $0 and approximately $2.1 million, respectively,
which represents the non-cash amortization of deferred costs related to the
warrants and Series A preferred stock issued to Microsoft. As of June 30, 2002,
the warrants were fully amortized. Also, on June 28, 2002, the Company completed
the repurchase of all of the Series A preferred stock and warrants (see Note 9
to the consolidated financial statements). Pursuant to the Company's adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets", the Company discontinued
its amortization of goodwill beginning January 1, 2002. For the same periods
last year, amortization of intangibles totaled approximately $17.4 million and
$96.2 million, which primarily represented goodwill amortization.

Net interest expense and other for the three and nine-month periods ended
September 30, 2002 was approximately $4.5 million and $11.1 million,
respectively. For the three and nine month-periods ended September 30, 2002,
those amounts include a $4.8 million gain related to the settlement of the BT
put and call obligation and a charge of approximately $2.9 million representing
an inducement for conversion of our subordinated debentures repurchased during

26

the third quarter. Those amounts also include $6.1 million and $11.4 million
related to write-downs of the Company's cost method investments for the three
and nine-month periods ended September 30, 2002, respectively. The majority of
the charge for the third quarter related to the write down to net realizable
value of the Company's investment in Converge, based on the agreement of sale
reached during the quarter (see Note 4 to the consolidated financial
statements). The remainder of the amounts are comprised of interest expense
related to the convertible debt, offset in part by interest and other income.
For the three and nine-month periods ended September 30, 2001, net interest
expense and other was approximately $199.8 million and $221.8 million,
respectively. For the three-month period, this amount includes an impairment
charge of approximately $195.4 million related to our investment in Converge and
other charges of approximately $2.4 million for write-downs associated with
other cost method, equity method, and available-for-sale investments. The
nine-month period includes approximately $220.8 million of similar write-downs,
including the impairment charge of $195.4 million for the Converge investment
and a realized loss of approximately $2.2 million on a marketable security. The
remainder of the amounts consisted primarily of interest expense related to the
convertible debt, offset in part by interest and other income.

On June 28, 2002, the Company repurchased all of its outstanding Series A
6% convertible redeemable preferred stock. At the time of the repurchase, the
carrying value of the preferred stock and the related accumulated dividends was
approximately $106.0 million. The Company paid $5.0 million in cash
consideration for the preferred shares, resulting in an increase in paid in
capital of $101.0 million which is included in income attributable to common
shareholders. As such, there were no preferred stock dividends recorded in the
three-month period ended September 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2002, our primary source of liquidity consisted of cash
and short-term investments. The majority of such funds are readily available for
operating purposes. At September 30, 2002, we had cash and cash equivalents
totaling approximately $11.8 million, compared to $50.3 million at December 31,
2001. At September 30, 2002 we had negative working capital of approximately
$18.2 million. Excluding deferred revenue of continuing operations, which
represents non-cash obligations to provide products or services to customers,
working capital at September 30, 2002 was a positive $3.6 million.

Net cash used in operating activities was approximately $22.6 million for
the nine months ended September 30, 2002. Net cash used in operating activities
consisted primarily of losses from continuing and discontinued operations,
changes in deferred revenues, accrued expenses, accrued restructuring, accounts
payable, and accounts receivable, offset in part by the non-cash impairment of
goodwill and write-downs of cost method investments, and decreases in prepaid
expenses and other assets.

Net cash provided by investing activities was $2.7 million for the nine
months ended September 30, 2002. Cash provided by investing activities include
$2.4 million from the sale of the SMB unit, $1.9 million from the sale of our
investment in Converge expected to finally close during the fourth quarter 2002,
and $1.8 million from the release of previously restricted funds. Cash used in
investing activities included the Company's additional investment for $3.5
million in Converge, shown net of the liquidation proceeds of $0.5 million from
the sale of cost method investments. Capital expenditures and capitalized
software costs for the nine-month period ended September 30, 2002 were
approximately $0.8 million, which consists primarily of capitalized software
related to the development of the Verticalnet products.

Net cash used in financing activities was approximately $18.5 million for
the nine months ended September 30, 2002. Net cash used in financing activities
includes $8.4 million for the settlement of the principal portion of the BT put
and call obligation (the settlement included an additional payment of $1.1
million for accrued interest which is reflected in cash used in operating
activities in the statement of cash flows) and $5.0 million for the repurchase
of all of the Company's outstanding preferred stock. On July 30, 2002, we
completed the repurchase of $13.85 million of our 5 1/4% convertible
subordinated debentures due September 2004 for total consideration of $2.9
million. This consideration included $0.8 million, or 1,270,854 shares, in
common stock consideration, and $2.1 million in cash consideration.
Additionally, we made a payment for accrued but unpaid interest of $0.3 million.
The remaining $7.9 million of debentures continue to accrue interest and
obligate the Company to make semi-annual interest payments accordingly. Also
included in net cash used in financing activities was approximately $1.0 million
paid under the put agreement with Atlas Commerce shareholders, as well as $2.1
million of principal payments on capital leases.

27

As of September 30, 2002, we have approximately $5.8 million of accrued
restructuring costs related to facility leases, $0.3 million of which were
assumed as part of the Atlas Commerce acquisition. We have made significant
efforts to estimate the expected costs to early terminate the leases or sublease
facilities. If these facilities cannot be sublet or the leases early terminated,
our contractual lease payments of approximately $11.1 million related to these
leases will be due over the respective lease terms in addition to aggregate
contractual lease payments of approximately $2.1 million related to facilities
we continue to use.

Our capital lease obligations of approximately $0.8 million as of September
30, 2002, are payable in the following amounts: $0.2 million, $0.4 million, and
$0.2 million during the years ended December 31, 2002, 2003 and 2004,
respectively.

Cash flows from a significant customer, Converge, were instrumental in
financing our business during 2002. As of June 30, 2002, all amounts due under
the license agreement with Converge have been collected in full. The license
arrangement is being accounted for as a "subscription" in accordance with SOP
97-2 with the license fee reflected as deferred revenue on the Company's
consolidated balance sheet. The fee was being recognized as revenue ratably over
the remaining term of the arrangement (through December 31, 2003) (See Note 16
to the consolidated financial statements regarding the subsequent amendment to
the Converge license agreement). The recognition of license revenues from
Converge does not provide cash to operations as such amounts have previously
been collected. As of September 30, 2002, there are approximately $1.8 million
of scheduled maintenance payments due from Converge under the amended and
restated service agreements. A failure by Converge to make all or part of these
payments on a timely basis, including any restructuring of these payments
(whether in terms of amount, timing or otherwise) could have an adverse effect
on our business, financial condition and operating results.

During the first nine months of 2002, our available cash and cash
equivalents declined by approximately $38.5 million, principally as a result of
continued operating losses, restructuring payments related to facilities and
severance, the settlement of the BT put and call obligation, and repurchase of
all outstanding Series A preferred stock. In addition, in July 2002, we used
$2.4 million in cash to repurchase a portion of our outstanding debentures.
These outflows were partially offset by the collection of $1.9 million in
consideration for the sale of the Company's investment in Converge, expected to
finally close in the fourth quarter of 2002.

Based on our most recent projections, we believe that our current level of
liquid assets and the expected cash flows from contractual arrangements will be
sufficient to finance our operations and capital expenditures through March 31,
2003. Any projection of our cash needs and cash flows beyond the next two
quarters is inherently subject to uncertainty.

We believe that under the current climate for the economy and the
technology sector, it will be extremely difficult for us to obtain additional
financing. Consequently, we are actively exploring alternatives to preserving
value for our creditors and stockholders, which may include a sale of all or
part of the Company or a reorganization or liquidation of the Company. We have
retained US Bancorp Piper Jaffray, an investment banker, to pursue a potential
sale of the Company. A sale, reorganization or liquidation of the Company could
result in the triggering of certain severance and third-party obligations, which
could be substantial.

If it would enhance our ability to sell all or part of the Company or
provide economic or other benefit in a reorganization or liquidation, we may
attempt to settle outstanding non-cancelable lease obligations and/or the
Company's convertible notes. If successful, our financial resources and the
related period during which the Company can expect to operate will be reduced.

RECENT ACCOUNTING PRONOUNCEMENTS

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

28

lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of."
Accordingly, there has been no amortization of goodwill since December 31, 2001.

We performed a goodwill impairment test as of September 30, 2002, under
SFAS No. 142. This test requires a comparison of the fair value of a reporting
unit with its carrying amount, including goodwill. For purposes of this test, we
did not consider the market capitalization of the Company, which consists of
only one reporting unit, to be representative of its fair value due to the
volatility of the market price. Accordingly, we estimated the fair value of the
business based upon the amounts we could reasonably expect to realize in the
sale of the assets of the business. As a result of this test, the Company
recorded an impairment charge to goodwill of approximately $27.5 million. Of
this amount, approximately $21.5 million relates to the December 28, 2001
acquisition of Atlas Commerce and approximately $6.0 million relates to the
company's acquisition of Isadra in August 1999.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No.
121, and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. SFAS No.
144 retains the fundamental provisions of SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS No. 121. For example, SFAS No. 144
provides guidance on how a long-lived asset that is used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived asset
that will be disposed of other than by sale. SFAS No. 144 retains the basic
provisions of APB Opinion No. 30 on how to present discontinued operations in
the income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment
assessment under SFAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142. We adopted and
implemented SFAS No. 144 as of January 1, 2002 in conjunction with our
accounting for our SMB business.

In November 2001, the FASB issued Topic D-103, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred." The FASB staff believes that reimbursements received for out-of-
pocket expenses incurred should be characterized as revenue in the income
statement. This guidance should be applied in financial reporting periods
beginning after December 15, 2001 and comparative financial statements for prior
periods should be reclassified to comply with the guidance. Accordingly, the
consolidated financial statements of operations have been reclassified pursuant
to this guidance.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections,"
which is effective for fiscal years beginning after May 15, 2002 for provisions
related to SFAS No. 4, effective for all transactions occurring after May 15,
2002 for provisions related to SFAS No. 13 and effective for all financial
statements issued on or after May 15, 2002 for all other provisions of this
Statement. We have elected to adopt this Statement early, and have applied its
provisions with respect to the classification of the $4.8 million gain on the
extinguishment of the BT obligation, which is included in net interest and other
expense.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses the
financial accounting and reporting of expenses related to restructurings
initiated after 2002, and applies to costs associated with an exit activity
(including a restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with an
exit or disposal activity when the liability is incurred and can be measured at
fair value. The provisions of this Statement are effective prospectively for
exit or disposal activities initiated after December 31, 2002. We have not
determined the impact of the adoption of this Statement on future periods.

29

FACTORS AFFECTING OUR BUSINESS CONDITION

WE DO NOT BELIEVE THAT WE WILL BE ABLE TO SUSTAIN OPERATIONS BEYOND MARCH 31,
2003. WE ARE EXPLORING ALTERNATIVES TO PRESERVING VALUE, INCLUDING A SALE OF THE
COMPANY.

Based on our most recent projections, we believe that our current level of
liquid assets and the expected cash flows from contractual arrangements will be
sufficient to finance our operations and capital expenditures through March 31,
2003. Any projection of our cash needs and cash flows beyond the next two
quarters is inherently subject to uncertainty.

We believe that under the current climate for the economy and the
technology sector, it will be extremely difficult for us to obtain additional
financing. Consequently, we are actively exploring alternatives to preserving
value for our creditors and shareholders, which may include a sale of all or
part of the Company or a reorganization or liquidation of the Company. We have
retained US Bancorp Piper Jaffray, an investment banker, to pursue a potential
sale of the Company. A sale, reorganization or liquidation of the Company could
result in the triggering of certain severance and third-party obligations, which
could be substantial.

If it would enhance our ability to sell all or part of the Company or
provide economic or other benefit in a reorganization or liquidation, we may
attempt to settle outstanding non-cancelable lease obligations and/or the
Company's convertible subordinated debentures. If successful, our financial
resources and the related period during which the Company can expect to operate
will be reduced.

OUR ABILITY TO COMPLETE THE SALE OR REORGANIZATION OF THE COMPANY DEPENDS ON OUR
KEY MANAGEMENT AND EXPERIENCED SOFTWARE PERSONNEL, WHOM WE MAY NOT BE ABLE TO
RETAIN.

We believe that our ability to complete a successful sale or reorganization
of the Company depends on continued employment of our senior management team and
on maintaining a highly trained product development staff. If one or more
members of our senior management team were unable or unwilling to continue in
their present positions, our prospects for selling or reorganizing the Company
could be materially adversely affected. If we are unable to retain trained
technical personnel, it could limit our ability to design and develop products,
which could reduce our attractiveness to potential acquirors.

WE DO NOT BELIEVE THAT WE WILL GENERATE AN OPERATING PROFIT.

As of September 30, 2002, our accumulated deficit was approximately $1.2
billion. For the nine months ended September 30, 2002, we sustained a $48.2
million loss from continuing operations. We expect to incur operating losses for
the foreseeable future (excluding the impact of the amendment of our agreement
with Converge executed on November 4, 2002 -- See Note 16 to the consolidated
financial statements). We do not believe that we will generate an operating
profit prior to the time that that we will either complete a sale of the Company
or pursue a reorganization or liquidation.

THE REVENUES AND OPERATING RESULTS OF OUR FORMER SMB UNIT ARE NO LONGER REPORTED
IN THE RESULTS FROM CONTINUING OPERATIONS SINCE JANUARY 1, 2002.

Our former SMB unit was the successor to the Company's original on-line
public marketplace business, and at March 15, 2002 employed 67 individuals
compared to 164 employed at that date in our enterprise software business. For
the year ended December 31, 2001, $90.0 million, or approximately 72% of our
overall revenues were generated primarily from sales of storefronts, marketplace
managers and advertising on our SMB unit's industry marketplaces. Because the
SMB unit has been treated as a discontinued operation since January 1, 2002, we
have not reported revenues or expenses from the SMB unit for any periods
presented as part of our continuing operations prior to the sale of the SMB
business on June 28, 2002. Since the sale, we have not reported any financial
performance of the SMB unit. As a result of our sale of the SMB unit, we
anticipate that the composition of our reported revenues will change
substantially in future periods. Beginning in 2002, we are increasingly
dependent on generating revenues from enterprise software licensing and
professional services. In the foreseeable future, we believe that we not be able
to generate revenues from our continuing operations at the levels we did prior
to January 1, 2002, when we included the revenues of the SMB unit in our
continuing operations.

30

WE MAY HAVE TO AMEND PREVIOUSLY FILED REPORTS WITH RESPECT TO REVENUE AND
EXPENSE ITEMS OF OUR DISCONTINUED SMB BUSINESS IF WE CANNOT OTHERWISE RESOLVE
COMMENTS WE HAVE RECEIVED FROM THE SEC.

In connection with our acquisition of Atlas Commerce, we filed a
registration statement on Form S-3 with the SEC registering the resale of shares
of our common stock issued in the acquisition. In connection with a routine
review and comment letter process related to this filing, we have received
comments from the SEC. The remaining open comments relate primarily to the
presentation and recognition of certain previously reported revenue and expense
items of our SMB business and whether one element of a material agreement should
be accounted for as "barter" in accordance with EITF No. 99-17, Accounting for
Advertising Barter Transactions. We believe the ultimate resolution of such
comments would not change our accumulated deficit at September 30, 2002,
although there could be differences in reported quarterly operating results
(refer to Note 14 to the consolidated financial statements for additional
information). The remaining open SEC comments do not relate in any way to our
ongoing collaborative supply chain software operations. The SMB business was
sold on June 28, 2002, and that business unit is reflected in our financial
statements as a discontinued operation for all periods presented, which requires
that all elements of revenue and expense be netted as a single line item to
report net results of discontinued operations. As a result, revenues and
expenses of our SMB business are no longer separately presented in our financial
statements. On October 19, 2002, we filed a response to the matters raised by
the SEC and are awaiting their response. We are currently in the process of
resolving these matters with the SEC and believe the historical presentations
and recognition of revenue and expense for the SMB business are appropriate. If
the SEC will not declare the Form S-3 effective without us first revising the
historical presentation and recognition of previously reported revenue and
expense items of our SMB business, then we will have to amend the reports that
are incorporated into the Form S-3.

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

We do not believe that we will be able to generate significant revenues
from enterprise software licensing and professional services. Our ability to
generate software revenues depends on the overall demand for enterprise software
solutions and professional services, as well as general economic and business
conditions. Suppressed demand for software solutions and services caused by a
weakening economy and reduced levels of spending on technology solutions may
result in less revenue growth than expected or even a decline in revenues. It is
likely that we will not be able to develop, enhance or promote our enterprise
software solutions and professional services effectively, whether as a result of
general economic conditions or otherwise. Further, our ability to generate
revenues from software licensing and professional services will be adversely
impacted by our present financial condition, which may worsen if economic
conditions and buying patterns in our market space do not dramatically improve
in the near term.

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

Our quarterly operating results are difficult to forecast and could vary
significantly. If our operating results in a future quarter or quarters do not
meet the expectations of securities analysts or investors, the price of our
common stock may fall. Our quarterly operating results will be substantially
dependent on software licenses booked and delivered in that quarter. Any delay
in the recognition of revenue for any of our license transactions could cause
significant variations in our quarterly operating results and could cause our
revenues to fall significantly short of anticipated levels. We also expect that
our quarterly operating results will fluctuate significantly due to other
factors, many of which are beyond our control, including:

- anticipated lengthy sales cycles for our products;

- the size and timing of individual license transactions;

- intense and increased competition in our target markets;

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

- risks associated with past acquisitions.

31

WE MAY BE UNABLE TO MAINTAIN OUR LISTING ON THE NASDAQ STOCK MARKET, WHICH COULD
CAUSE OUR STOCK PRICE TO FALL AND DECREASE THE LIQUIDITY OF OUR COMMON STOCK.

Our common stock is currently listed on The Nasdaq Stock Market, which has
requirements for the continued listing of stock. In May 2002, we transferred our
listing from the Nasdaq National Market to the Nasdaq Small-Cap Market due to
our inability to comply with the Nasdaq National Market bid price and
shareholders' equity requirements. Continued listing on the Nasdaq Small-Cap
Market requires us to maintain $2.5 million in shareholders' equity and our
common stock to maintain a minimum bid price of $1.00 per share. Although we
completed a 1-for-10 reverse split of our common stock on July 15, 2002, the bid
price for our common stock has closed below $1.00 for several weeks at a time.
We will not meet the continued listing standard if the closing price of our
common stock is less than $1.00 for 30 consecutive trading days. As of November
1, 2002, our common stock had traded at or above $1.00 for 7 consecutive trading
days, although we cannot offer any assurances that it will continue to trade at
that level. Our Form 10-Q for the nine months ended September 30, 2002 discloses
a shareholders' deficit of approximately $15.9 million, which is below the
Nasdaq Small Cap Market continued listing requirement of shareholders' equity of
$2.5 million. With the elimination of our obligation to provide future products
to Converge at no cost under the amendment dated November 4, 2002, our pro forma
shareholders' equity is $3.8 million, although we cannot offer any assurance
that our shareholders' equity will remain above the continued listing levels.

As a result of the recent resignation of an independent director and member
of our audit committee, we are currently not in compliance with Nasdaq's
requirements regarding audit committee membership (i.e., that the audit
committee be comprised of at least three members, one of whom has significant
financial expertise), because our audit committee is currently comprised of only
two members, neither of whom has the financial background required by the Nasdaq
rules. Nasdaq has granted the Company an extension of time until January 23,
2003 to comply with the audit committee membership requirements. There is no
assurance that we will be able to comply with Nasdaq's audit committee
requirements by such time, which could result in the Company being delisted from
The Nasdaq Stock Market.

If we do not maintain compliance with the Nasdaq Small-Cap Market continued
listing standards, then our common stock may be delisted from The Nasdaq Stock
Market and the trading market for our common stock could decline, which could
depress our stock price and adversely affect the liquidity of our common stock.

IF OUR STOCK IS DELISTED FROM THE NASDAQ STOCK MARKET AND OUR SHARE PRICE
DECLINES SIGNIFICANTLY, THEN OUR STOCK MAY 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 in broker-dealers who sell our
securities. Because of these additional obligations, some brokers may be
unwilling to effect transactions in our stock. This could have an adverse effect
on the liquidity of our common stock and the ability of investors to sell the
common stock. For example, broker-dealers must 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 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.

IF OUR STOCK IS DELISTED FROM THE NASDAQ STOCK MARKET AND OUR SHARE PRICE
DECLINES SIGNIFICANTLY, THEN WE MAY BE UNABLE TO LICENSE OUR PRODUCTS AND SELL
OUR SERVICES TO PROSPECTIVE OR EXISTING CUSTOMERS.

If our stock is delisted and our share price declines significantly, our
prospective and existing customers may lose confidence that we can continue as a
viable business to provide the support necessary to further develop the solution
and provide ongoing maintenance and consulting services. Prospective and
existing customers could consider alternative solutions or significantly reduce
the value they are willing to pay for our solution to compensate for the
potential added risk to their business. Our ability to meet our revenue goals
could be adversely impacted, resulting in further deterioration of the financial
condition of the business.

32

WE ANTICIPATE LENGTHY SALES CYCLES FOR OUR SOFTWARE PRODUCTS, AND DIFFICULTY IN
OBTAINING CUSTOMER COMMITMENTS.

The Company has not executed a software license agreement since March 2002.
Looking forward, we anticipate the sales cycles for our enterprise software
products to average approximately nine to twelve months. We have experienced an
increase in the length of sales cycles during 2002. We have also experienced
difficulty in obtaining customer commitments to enter into contracts even after
we have been selected as the preferred vendor. If the economy and the market for
technology solutions remain depressed or continue to worsen, then our average
sales cycle could become increasingly longer and our ability to enter into
customer agreements could be come increasingly more difficult. In selling our
products, we may be asking potential customers in many cases to change their
established business practices and conduct business in new ways. In addition,
potential customers must generally consider additional issues, such as product
benefits, ease of installation, ability to work with existing technology,
functionality and reliability, and adoption by their suppliers, before
committing to purchase our products. Additionally, we believe that the purchase
of our products is often discretionary and generally involves a significant
commitment of capital and other resources by a customer, which frequently
requires approval at a number of management levels within the customer
organization. Likewise, the implementation and deployment of our enterprise
software products requires a significant commitment of resources by our
customers and our professional services organization. The challenges we face in
attempting to obtain commitments and approvals from our customers may be
exacerbated by worsening economic conditions in general and in our target
markets, as well as by competition from other software solution providers whose
brands, products and services may be better known to, and more widely accepted
by, potential customers than ours.

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

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

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

Our enterprise software products may contain undetected errors or failures
when first introduced or as new versions are released. This may result in loss
of, or delay in, market acceptance of our products. Errors in new releases and
new products after their introduction could result in delays in release, lost
revenues and customer frustration during the period required to correct these
errors. We may in the future discover errors and defects in new releases or new
products after they are shipped or released.

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

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

33

dissatisfaction. Our success will also depend in part on our ability to acquire
or license third party technologies that are useful in our business, which we
may not be able to do.

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

The markets for our software products and services are intensely
competitive, which may result in low or negative profit margins and difficulty
in achieving market share, either of which could seriously harm our business. We
expect the intensity of competition to increase. Our enterprise software
products and services face competition from software companies whose products or
services compete with a particular aspect of the solution we provide, as well as
several major enterprise software developers. Many of our competitors have
longer operating histories, greater brand recognition and greater financial,
technical, marketing and other resources than we do, and may have
well-established relationships with our existing and prospective customers. This
may place us at a disadvantage in responding to our competitors' pricing
strategies, technological advances, advertising campaigns, strategic
partnerships and other initiatives. Our competitors may also develop products or
services that are superior to or have greater market acceptance than ours. If we
are unable to compete successfully against our competitors, our business,
financial condition and operating results would be negatively impacted.

WE HAVE HAD DECREASES IN THE FAIR VALUE, AND IN SOME CASES A COMPLETE LOSS, OF
OUR EQUITY INVESTMENTS.

We hold investments in equity instruments of privately-held companies that
we made for business and strategic purposes prior to 2002. Such items are
included in other investments on our balance sheet. For the nine months ended
September 30, 2002, we recorded an aggregate of $11.4 million in impairment
charges for other than temporary declines in the fair value of our cost method,
equity method and available-for-sale investments, $9.5 million of which was a
write-down of the fair value of our equity investment in, and note receivable
from, Converge, on which we entered into a sale agreement as of September 30,
2002. The sale is expected to finally close during the quarter ending December
31, 2002. Our quarterly results have been materially reduced due to our
determination that an impairment in the fair value of one or more of these
investments was other than temporary, which required us to write down or write
off the carrying value of those securities. As of September 30, 2002, we held
cost method investments with a carrying value of $0.7 million. We may never
realize any return on our equity interests that we continue to hold, and we may
suffer a complete loss of these interests, which could materially and adversely
affect our business, financial condition and operating results.

IF WE DO NOT DEVELOP THE "VERTICALNET" BRAND IN THE ENTERPRISE SOFTWARE
INDUSTRY, OUR REVENUES MIGHT NOT INCREASE.

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

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

As a result of its stock ownership and board representation, Internet
Capital Group is in a position to affect our business strategy and operations,
including corporate actions such as mergers or takeover attempts, in a manner
that could conflict with the interests of our public shareholders. At September
30, 2002, Internet Capital Group beneficially owned 4,017,970 shares, or
approximately 29.4%, of our common stock, which includes 47,862 shares of our
common stock underlying warrants issued to Internet Capital Group prior to our
initial public offering. One representative of Internet Capital Group is a
member of our board of directors. We may compete with Internet Capital Group and
its partner companies for enterprise software opportunities, in part through
acquisitions and investments. Internet Capital Group, therefore, may seek to
acquire or invest in companies that we would find attractive. While we may
partner with Internet Capital Group on future acquisitions or investments, we
have no current contractual obligations to do so. We do not have any contracts
or other understandings that would govern resolution of this potential conflict.
This competition, and the potential conflict posed by the designated director,
may deter companies from partnering with us and may limit our business
opportunities.

34

INTERNET CAPITAL GROUP MAY HAVE TO BUY OR SELL OUR STOCK TO AVOID REGISTRATION
UNDER THE INVESTMENT COMPANY ACT OF 1940, WHICH MAY NEGATIVELY AFFECT OUR STOCK
PRICE.

To avoid registration under the Investment Company Act of 1940, Internet
Capital Group may need to continue to own more than 25% of our voting securities
and to continue to have a representative on our board of directors. Under the
Investment Company Act, a company is considered to control another company if it
owns more than 25% of that company's voting securities and is the largest
stockholder of such company. A company may be required to register as an
investment company if more than 45% of its total assets consist of, and more
than 45% of its income/loss and revenue attributable to it over the last four
quarters is derived from, ownership interests in companies it does not control.
Internet Capital Group has publicly stated that it is not feasible to be
regulated as an investment company because the Investment Company Act rules are
inconsistent with their corporate strategy. As of September 30, 2002, Internet
Capital Group's ownership interest in us was 21.7%. Internet Capital Group's
total beneficial ownership in us is 4,017,970, or 29.4% of our common stock,
because it has an agreement with Safeguard Scientifics that provides it with the
right of first refusal to purchase the 1,052,310 shares of our stock that
Safeguard owns. If its ownership interest falls below 25%, Internet Capital
Group may need to purchase additional voting securities to return to an
ownership interest of at least 25% to avoid having to register as an investment
company. The possible need of Internet Capital Group to maintain a 25% ownership
position could adversely influence its decisions regarding actions that may
otherwise be in the best interests of our public shareholders. If Internet
Capital Group sells all or part of its investment in us, whether to comply with
the Investment Company Act of 1940, to raise additional capital or otherwise, it
could adversely affect our common stock's market price.

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

Proprietary rights are important to our success and our competitive
position. We may be unable to register, maintain and protect our proprietary
rights adequately or to prevent others from claiming violations of their
proprietary rights. Although we file copyright registrations for the source code
underlying our software, enforcement of our rights might be too difficult and
costly for us to pursue effectively. We have filed patent applications for the
proprietary technology underlying our software, but our ability to fully protect
this technology is contingent upon the ultimate issuance of the corresponding
patents. Effective patent, copyright and trade secret protection of our software
may be unavailable or limited in certain countries.

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

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

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

If our shareholders or option holders sell substantial amounts of our
common stock in the public market, including shares issued in completed or
future acquisitions or upon the exercise of outstanding options and warrants,
then the market price of our common stock could fall. As of September 30, 2002,
the holders of 5,098,011 shares of common stock and warrants to purchase 47,862
shares of common stock have demand and/or piggyback registration rights. The
exercise of such rights could adversely affect the market price of our common
stock. We also have filed a shelf registration statement to facilitate our
acquisition strategy, as well as registration statements to register shares of
common stock under our stock option and employee stock purchase plans. Shares
issued pursuant to existing or future shelf registration statements, upon
exercise of stock options and in connection with our employee stock purchase
plan will be eligible for resale in the public market without restriction.

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

Verticalnet is a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a third party to acquire
control of us, even if such change in control would be beneficial to our
shareholders. Our articles of incorporation provide that our board of directors
may issue preferred stock without shareholder approval. In

35

addition, our bylaws provide for a classified board, with each board member
serving a staggered three-year term. The issuance of preferred stock and the
existence of a classified board could make it more difficult for a third party
to acquire us.

OUR COMMON STOCK PRICE IS LIKELY TO REMAIN HIGHLY VOLATILE.

The market for stocks of technology companies has been highly volatile
since our initial public offering in 1999. Throughout this period, the market
price of our common stock has reached extreme highs and lows, and our daily
trading volume has been, and will likely continue to be, highly volatile.
Investors may not be able to resell their shares of our common stock following
periods of price or trading volume volatility because of the market's adverse
reaction to such volatility. Factors that could cause volatility in our stock
price and trading volume, in some cases regardless of our operating performance,
include, among other things:

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

- actual or anticipated variations in quarterly operating results;

- announcements of technological innovations;

- new products or services;

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

- failure to meet analysts' or investors' expectations;

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

- our cash position and cash commitments;

- our prospects for software sales and new customers; and

- additions or departures of key personnel.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk related changes in interest rates relates
primarily to our investment portfolio. We invest in instruments that meet high
quality credit standards, as specified in our investment policy. The policy also
limits the amount of credit exposure we may have to any one issue, issuer or
type of investment. As of September 30, 2002, our portfolio of investments
included $11.8 million in cash and cash equivalents. Due to the conservative
nature of our investment portfolio, we believe that a sudden change in interest
rates would not have a material effect on the value of the portfolio. We
estimate that if the average yield of our investments had decreased by 100 basis
points, our interest income for the three months ended September 30, 2002 would
have decreased by less than $0.1 million. This estimate assumes that the
decrease occurred on the first day of the year and reduced the yield of each
investment instrument by 100 basis points. The impact on our future interest
income and future changes in investment yields will depend largely on the gross
amount of our investment portfolio.

We invest in equity instruments of privately-held companies for business
and strategic purposes. These investments are included in other investments and
are accounted for under the cost method when ownership is less than 20% and we
do not have the ability to exercise significant influence over operations. As of
September 30, 2002 we hold cost method equity investments with a carrying value
of approximately $0.7 million. For these investments in privately-held
companies, our policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the recoverability of
the carrying values. We identify and record impairment losses when events and
circumstances indicate that such assets might be impaired.

In connection with Ariba's acquisition of Tradex Technologies, Inc., we
received Ariba common stock. In July 2000, we entered into forward sale
contracts relating to our investment in Ariba. Under these contracts, we pledged
our shares of Ariba's common stock to the counterparty for a three-year period
in return for approximately $47.4 million of cash. At the conclusion of the
three-year period, we have the option of delivering either cash or the pledged
Ariba shares to satisfy the forward sale. However, we will not be required to
deliver shares in excess of those we pledged. If we choose to deliver Ariba
shares to satisfy the forward sale, the number of Ariba shares to be delivered
at maturity may vary depending on the
36

then market price of Ariba's common stock. We have only limited involvement with
derivative financial instruments and do not use them for trading purposes. Our
risk of loss in the event of nonperformance by the counterparty under the
forward sales contract is not considered to be significant. Although the forward
sales contract exposes us to market risk, fluctuations in the fair value of
these contracts are mitigated by expected offsetting fluctuations in the value
of the pledged securities.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. The Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of a date within 90 days of the filing date of this
quarterly report. The Company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the Company in the
reports that are filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that these controls and procedures are effective.

(b) Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of Company's evaluation, including
any corrective actions with regard to significant deficiencies or material
weaknesses.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 12, 2001, a class action lawsuit was filed against us and several
of our officers and directors in U.S. Federal Court for the Southern District of
New York in an action captioned CJA Acquisition, Inc. v. Verticalnet, et al.,
C.A. No. 01-CV-5241 (the "CJA Action"). Also named as defendants were four
underwriters involved in the issuance and initial public offering of our common
stock in February 1999 -- Lehman Brothers Inc., Hambrecht & Quist LLC, Volpe
Brown Whelan & Company LLC and WIT Capital Corporation. The complaint in the CJA
Action alleges violations of Sections 11 and 15 of the Securities Act of 1933
and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, based on, among other things, claims that the four
underwriters awarded material portions of the initial shares to certain favored
customers in exchange for excessive commissions. The plaintiff also asserts that
the underwriters engaged in a practice known as "laddering," whereby the clients
or customers agreed that in exchange for IPO shares they would purchase
additional shares at progressively higher prices after the IPO. With respect to
Verticalnet, the complaint alleges that the company and its officers and
directors failed to disclose in the prospectus and the registration statement
the existence of these purported excessive commissions and laddering agreements.
After the CJA Action was filed, several "copycat" complaints were filed in U.S.
Federal Court for the Southern District of New York. Those complaints, whose
allegations mirror those found in the CJA Action, include Ezra Charitable Trust
v. Verticalnet, et al., C.A. No. 01-CV-5350; Kofsky v. Verticalnet, et al., C.A.
No. 01-CV-5628; Reeberg v. Verticalnet, C.A. No. 01-CV-5730; Lee v. Verticalnet,
et al., C.A. No. 01-CV-7385; Hoang v. Verticalnet, et al., C.A. No. 01-CV-6864;
Morris v. Verticalnet, et al., C.A. No. 01-CV-9459, and Murphy v. Verticalnet,
et al., C.A. No. 01-CV-8084. None of the complaints state the amount of any
damages being sought, but do ask the court to award "rescissory damages." All of
the foregoing suits were amended and consolidated into a single complaint that
was filed with the U.S. Federal Court on April 19, 2002. This amended complaint
contains additional factual allegations concerning the events discussed in the
original complaints, and asserts that, in addition to Sections 11 and 15 of the
Securities Act, the Company and our officers and directors also violated
Sections 10(b), 20(a) and Rule 10b-5 of the Exchange Act in connection with the
IPO. In addition to this amended and consolidated complaint, the plaintiffs in
this lawsuit and in the hundreds of other similar suits filed against other
companies in connection with IPOs that occurred in the late 1990s have filed
"master allegations" that primarily focus on the conduct of the underwriters of
the IPOs, including our IPO. On October 9, 2002, the U.S. Federal Court for the
Southern District of New York entered an order dismissing, without prejudice,
the claims against the individual Verticalnet officers and directors who had
been named as defendants in the various complaints. We have retained counsel and
intend to vigorously defend ourselves in connection with the allegations raised
in the amended and consolidated complaint. In addition, we intend to enforce our
indemnity rights with respect to the underwriters who are also named as
defendants in the amended and consolidated complaint.
37

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

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

(c) During the quarter ended September 30, 2002, we issued the following
unregistered securities pursuant to the following transaction:

(i) On July 24, 2002, we completed the repurchase of $13.85 million of
our 5 1/4% Convertible Subordinated Debentures due September 2004 for total
consideration of $2.9 million. This consideration included $0.8 million, or
1,270,854 shares, in common stock consideration, and $2.1 million in cash
consideration. Additionally, we made a payment for accrued but unpaid
interest of $0.3 million, also in cash. This transaction was completed,
under the same terms and conditions, with two separate bondholders -- one,
a third party unaffiliated bondholder, and the other, a subsidiary of a
principal shareholder of the Company -- Internet Capital Group. This
transaction was exempt from registration under Section 3(a)(9) of the
Securities Act of 1933, as amended.

(ii) On September 12, 2002, we completed the repurchase of the
remaining 10% interest in Verticalnet Europe, B.V. that we did not own, for
consideration of $6.5 million in cash and 1,000,000 shares of our common
stock valued at $1.2 million, from Ballinrobe Limited, an affiliate of
British Telecommunications Plc. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.

The transactions were privately negotiated and did not include any general
solicitation or advertising. Each purchaser represented that it was acquiring
the shares without a view to distribution and was afforded an opportunity to
review all publicly filed documents and to ask questions and receive answers
from our officers.

(d) Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

(a) None.

(b) None.

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

(a) None.

ITEM 5. OTHER INFORMATION

Provisions of Non-Audit Services. KPMG LLP is the Company's independent
public accountant and also provides the Company with tax compliance and tax
advisory services. The Audit Committee of the Company's Board of Directors has
approved the provision by KPMG LLP of these services.

38

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

The following exhibits are filed as part of this Form 10-Q:

- ---------------
* Filed herewith.

(b) Reports on Form 8-K.

On September 24, 2002, we filed a Current Report on Form 8-K, dated
September 12, 2002, regarding the completion of the repurchase of the remaining
10% interest in Verticalnet Europe B.V. that we did not own.

39

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Malvern,
Pennsylvania, on November 7, 2002.

VERTICALNET, INC.

By: /s/ KEVIN S. MCKAY
-------------------------------------
Kevin S. McKay
President and Chief Executive Officer

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

40

CEO CERTIFICATION FOR
QUARTERLY REPORTS ON 10-Q PURSUANT TO RULE 13A-14 OF THE
SECURITIES EXCHANGE ACT

I, Kevin S. McKay, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Verticalnet, Inc.

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;

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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

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; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

By: /s/ KEVIN S. MCKAY
-------------------------------------
Name: Kevin S. McKay
Title: President and Chief Executive
Officer

Date: November 7, 2002

41

CFO CERTIFICATION FOR
QUARTERLY REPORTS ON 10-Q PURSUANT TO RULE 13A-14 OF THE
SECURITIES EXCHANGE ACT

I, John A. Milana, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Verticalnet, Inc.

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;

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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

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; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

By: /s/ JOHN A. MILANA
-------------------------------------
Name: John A. Milana
Title: Chief Financial Officer

Date: November 7, 2002

42