VERTICALNET INC, 10-Q, 2000-11-14

VERTICALNET INC
10-Q, 2000-11-14
ADVERTISING

Previous: GENE LOGIC INC, 10-Q, EX-27.1, 2000-11-14

Next: VERTICALNET INC, 10-Q, EX-27, 2000-11-14

<PAGE> 1

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

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, 2000

[ ] 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.)

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

700 DRESHER ROAD
HORSHAM, PA 19044
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

(215) 328-6100

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 issuer's classes
of common stock, as of the latest practicable date:

As of November 1, 2000, 87,533,289 shares of Registrant's common stock were
outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

VERTICALNET, INC.

FORM 10-Q
(FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000)

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I
Item 1. Consolidated Financial Statements........................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 43

Part II
Item 1. Legal Proceedings........................................... 44
Item 2. Change in Securities and Use of Proceeds.................... 44
Item 3. Default Upon Senior Securities.............................. 45
Item 4. Submission of Matters to a Vote of Security Holders......... 45
Item 5. Other Information........................................... 45
Item 6. Exhibits and Reports on Form 8-K............................ 45
</TABLE>

2
<PAGE> 3

VERTICALNET, INC.

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 87,580 $ 14,254
Short-term investments.................................... 36,928 44,131
Accounts receivable, net of allowance for doubtful
accounts of $2,769 in 2000 and $2,085 in 1999.......... 50,133 45,776
Inventory................................................. 22,023 5,510
Prepaid expenses and other assets......................... 43,568 5,964
------------ --------
Total current assets................................... 240,232 115,635
------------ --------
Property and equipment, net................................. 48,998 13,148
Goodwill, net of accumulated amortization of $128,233 in
2000 and $7,323
in 1999................................................... 605,799 159,253
Other intangibles, net of accumulated amortization of $8,681
in 2000 and $780 in 1999.................................. 53,169 18,671
Long-term investments....................................... 81,264 16,885
Other assets................................................ 54,225 17,312
------------ --------
Total assets........................................... $ 1,083,687 $340,904
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 18,100 14,515
Accrued expenses.......................................... 27,837 20,102
Deferred revenues......................................... 57,181 9,768
Other current liabilities................................. 4,908 1,372
------------ --------
Total current liabilities.............................. 108,026 45,757
------------ --------
Long-term debt.............................................. 1,322 1,750
Other long-term liabilities................................. 52,398 --
Convertible subordinated debentures......................... 21,705 115,000
------------ --------
Total liabilities...................................... 183,451 162,507
------------ --------
Commitments and contingencies (Note 9)

Shareholders' Equity:
Preferred stock $.01 par value, 10,000,000 shares
authorized; Series A 6.00% convertible redeemable
preferred stock, 250,000 shares designated, 101,450
shares issued in 2000 plus accrued dividends of $1,522
(liquidation value of $102,972)........................ 92,468 --
Common stock $.01 par value, 1,000,000,000 shares
authorized, 87,496,358 shares issued in 2000 and
72,120,866 shares issued in 1999....................... 875 721
Common stock to be issued................................. -- 99,546
Additional paid-in capital................................ 1,023,277 151,875
Deferred compensation..................................... (19,939) (601)
Accumulated other comprehensive loss...................... (4,769) (219)
Accumulated deficit....................................... (190,871) (72,773)
------------ --------
901,041 178,549
Treasury stock at cost, 656,356 shares in 2000 and 649,936
shares in 1999......................................... (805) (152)
------------ --------
Total shareholders' equity............................. 900,236 178,397
------------ --------
Total liabilities and shareholders' equity............. $ 1,083,687 $340,904
============ ========
</TABLE>

See accompanying notes to consolidated financial statements.
3
<PAGE> 4

VERTICALNET, INC.

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Exchange transaction sales..................... $229,502 $ -- $ 496,770 $ --
Cost of exchange transaction sales............. 190,224 -- 413,791 --
-------- -------- --------- --------
Net exchange revenues........................ 39,278 -- 82,979 --
E-enablement, e-commerce, advertising and
services revenues............................ 34,455 5,182 71,763 10,667
-------- -------- --------- --------
Combined revenues............................ 73,733 5,182 154,742 10,667
COSTS AND EXPENSES:
Editorial and operational...................... 15,771 2,553 28,801 5,438
Product development............................ 9,259 2,225 22,100 4,920
Sales and marketing............................ 38,170 7,924 93,770 17,101
General and administrative..................... 30,111 3,084 61,556 6,434
Amortization expense........................... 54,293 2,092 125,567 2,702
In-process research and development charge..... -- 13,600 10,000 13,600
-------- -------- --------- --------
Operating loss................................. (73,871) (26,296) (187,052) (39,528)
-------- -------- --------- --------
Other income (expense)......................... (1,250) -- 67,969 --
Interest income, net........................... 629 469 985 1,332
-------- -------- --------- --------
Net loss....................................... $(74,492) $(25,827) $(118,098) $(38,196)
Preferred stock dividends...................... (1,522) -- (2,972) --
-------- -------- --------- --------
Loss attributable to common shareholders....... $(76,014) $(25,827) $(121,070) $(38,196)
======== ======== ========= ========
Basic and diluted net loss per common share.... $ (0.88) $ (0.37) $ (1.49) $ (0.65)
======== ======== ========= ========
Weighted average common shares outstanding used
in basic and diluted per share calculation... 86,616 69,243 81,508 59,192
======== ======== ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.
4
<PAGE> 5

VERTICALNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- --------
(UNAUDITED)
<S> <C> <C>
Net loss.................................................... $(118,098) $(38,196)
--------- --------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, amortization and other noncash charges... 133,950 3,858
Income from equity method investments.................. (701) --
Net gain on investment................................. (79,875) --
In-process research and development charge............. 10,000 13,600
Change in assets, net of effect of acquisitions:
Accounts receivable.................................. 50,446 (5,338)
Inventory............................................ (891) --
Prepaid expenses and other assets.................... (25,613) (1,160)
Change in liabilities, net of effect of acquisitions:
Accounts payable..................................... (2,671) 1,813
Accrued expenses..................................... 8,993 1,729
Deferred revenues.................................... 47,046 4,743
--------- --------
Net cash provided by (used in) operating activities....... 22,586 (18,951)
--------- --------
Investing activities:
Acquisitions, net of cash acquired........................ (30,864) (7,219)
Purchase of available-for-sale investments................ (85,937) (105,362)
Purchase of cost and equity method company investments,
net of sale of redeemable preferred stock.............. (20,800) --
Proceeds from sale and redemption of available-for-sale
investments............................................ 107,014 68,555
Restricted cash........................................... (9,612) (1,220)
Advances.................................................. -- (965)
Capital expenditures...................................... (39,179) (1,557)
--------- --------
Net cash used in investing activities..................... (79,378) (47,768)
--------- --------
Financing activities:
Borrowings under line of credit........................... 68,299 --
Repayments of line of credit.............................. (111,691) (2,000)
Proceeds from forward sale................................ 47,441 --
Principal payments on long-term debt and obligations under
capital leases......................................... (1,570) (1,116)
Net proceeds from issuance of common stock in initial
public offering........................................ -- 58,459
Net proceeds from convertible debt issuance............... -- 96,250
Net proceeds from issuance of Series A 6.00% convertible
redeemable preferred stock............................. 99,900 --
Proceeds from exercise of stock options and employee stock
purchase plan.......................................... 27,739 1,173
--------- --------
Net cash provided by financing activities................. 130,118 152,766
--------- --------
Net increase in cash........................................ 73,326 86,047
Cash and cash equivalents -- beginning of period............ 14,254 5,663
--------- --------
Cash and cash equivalents -- end of period.................. $ 87,580 $ 91,710
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest (includes
conversion payment to debt holders).................... $ 16,326 $ 261
========= ========
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired under capital leases................... $ 736 $ 2,517
Issuance of common stock as consideration for
acquisitions........................................... $ 617,212 $ 49,061
Warrant exercises......................................... $ 653 $ 92
Notes converted to common stock........................... $ -- $ 5,000
Preferred dividends....................................... $ 2,972 $ --
Conversion of convertible subordinated debentures to
common stock........................................... $ 90,400 $ --
</TABLE>

See accompanying notes to consolidated financial statements.
5
<PAGE> 6

VERTICALNET, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- --------------- COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT TO BE ISSUED CAPITAL COMPENSATION
------ ------- ------ ------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000......... -- $ -- 72,121 $721 $ 99,546 $ 151,875 $ (601)
Issuance of Series A 6.00%
convertible redeemable
preferred stock and warrants... 100 89,496 -- -- -- 18,007 --
Series A 6.00% convertible
redeemable preferred stock
dividends issued............... 1 1,450 -- -- -- (1,450) --
Series A 6.00% convertible
redeemable preferred stock
dividends accrued.............. -- 1,522 -- -- -- (1,522) --
Conversion of convertible debt... -- -- 4,665 46 -- 90,354 --
Exercise of options.............. -- -- 3,377 34 -- 24,962 --
Shares issued through employee
stock purchase plan............ -- -- 113 1 -- 2,742 --
Shares issued as consideration
for acquisitions............... -- -- 7,063 71 (99,546) 716,687 --
Exercise of warrants............. -- -- 157 2 -- 651 --
Unearned compensation............ -- -- -- -- -- 20,971 (20,971)
Amortization of unearned
compensation................... -- -- -- -- -- -- 1,633
Net loss......................... -- -- -- -- -- -- --
Other comprehensive loss......... -- -- -- -- -- -- --
--- ------- ------ ---- -------- ---------- --------
Balance, September 30, 2000...... 101 $92,468 87,496 $875 $ -- $1,023,277 $(19,939)
=== ======= ====== ==== ======== ========== ========

<CAPTION>
ACCUMULATED OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY SHAREHOLDERS'
LOSS DEFICIT STOCK EQUITY
----------------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 2000......... $ (219) $ (72,773) $(152) $ 178,397
Issuance of Series A 6.00%
convertible redeemable
preferred stock and warrants... -- -- -- 107,503
Series A 6.00% convertible
redeemable preferred stock
dividends issued............... -- -- -- --
Series A 6.00% convertible
redeemable preferred stock
dividends accrued.............. -- -- -- --
Conversion of convertible debt... -- -- -- 90,400
Exercise of options.............. -- -- -- 24,996
Shares issued through employee
stock purchase plan............ -- -- -- 2,743
Shares issued as consideration
for acquisitions............... -- -- -- 617,212
Exercise of warrants............. -- -- (653) --
Unearned compensation............ -- -- -- --
Amortization of unearned
compensation................... -- -- -- 1,633
Net loss......................... -- (118,098) -- (118,098)
Other comprehensive loss......... (4,550) -- -- (4,550)
------- --------- ----- ---------
Balance, September 30, 2000...... $(4,769) $(190,871) $(805) $ 900,236
======= ========= ===== =========
</TABLE>

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net loss.................................................... $(74,492) $(25,827) $(118,098) $(38,196)
Unrealized gain (loss) on net investments................... 18,225 2 (4,550) (130)
-------- -------- --------- --------
Comprehensive loss.......................................... $(56,267) $(25,825) $(122,648) $(38,326)
======== ======== ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

6
<PAGE> 7

VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) VERTICALNET, INC. AND BASIS OF PRESENTATION

Description of VerticalNet, Inc.

VerticalNet, Inc. ("VerticalNet"), through its wholly-owned subsidiaries,
provides end-to-end e-commerce solutions targeted at distinct business segments
through three strategic business units:

- VerticalNet Markets includes 57 industry-specific digital marketplaces
designed as online vertical trading communities and provides hosted
e-commerce and community capabilities for corporate divisions and small
and medium sized businesses;

- VerticalNet Exchanges focuses on trading electronic components and
hardware in open and spot markets; and

- VerticalNet Solutions builds digital marketplaces for our industry
alliances, independent Net market makers and global 2000 enterprises.

Our consolidated financial statements as of, and for, the three and nine
months ended September 30, 2000 and September 30, 1999 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 financial statements that accompany these notes reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly our results of operations for the three and nine months ended
September 30, 2000 and September 30, 1999 and our cash flows for the nine months
ended September 30, 2000 and September 30, 1999. 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 consolidated financial statements and notes included in our
Annual Report on Form 10-K for the year ended December 31, 1999.

Revenue Recognition

We currently generate revenue from three primary sources: e-enablement and
e-commerce; advertising and services; and exchange transactions. We anticipate
generating revenue from software licensing and related professional services, as
well as hosting, maintenance and other business operations services, as we
continue to develop and market our VerticalNet Solutions business. As of
September 30, 2000, we had not recognized any revenue from software licensing.
However, as of September 30, 2000, we had recognized an insignificant amount of
revenue from professional services, which is included in advertising and
services revenue.

E-enablement and e-commerce revenues include storefront and e-commerce
center fees, Web site development fees and e-commerce fees. Storefront and
e-commerce center fees are recognized ratably over the period of the contract.
Web site development fees are recognized as earned. E-commerce fees, whether in
the form of transaction fees, percentage of sale fees or minimum guaranteed
fees, are recognized when earned. E-commerce fees from educational courses are
recognized in the period in which the course is completed. E-commerce fees from
books and other product sales are recognized in the period in which the products
are shipped. Auction transaction fees are recognized when the auction is
successfully concluded.

Advertising and services revenues, including buttons and banners, are
recognized ratably over the period of the applicable contract. Newsletter
sponsorship revenues are recognized when the newsletters are e-mailed.
Advertising contracts generally do not extend beyond one year, although certain
contracts are for multiple years. We also enter into strategic co-marketing
agreements under which we create co-branded sites. Revenues from hosting and
maintenance services under these co-marketing arrangements are recognized as
earned over the term of the contract.

7
<PAGE> 8
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Although we have not recognized a material amount of revenue from software
licensing and related professional and business operations services, we expect
revenue from these types of arrangements to become more significant in the
future. Statement of Position ("SOP") 97-2, Software Revenue Recognition,
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. License revenue allocated to software products generally is
recognized upon delivery of the software products or ratably over a contractual
period if unspecified software products are to be delivered during that period.
Revenue allocated to hosting and maintenance services is recognized ratably over
the contract term and revenue allocated to professional services is recognized
as the services are performed. If the professional services provided are
essential to the functionality or are for significant production, modification
or customization of the software products, both the software product revenue and
service revenue are recognized in accordance with the provisions of SOP 81-1,
Accounting for Performance of Construction Type and Certain Production Type
Contracts. Revenues and costs are recognized based on the labor hours incurred
to date, compared to total estimated labor hours over the term of the contract.
As of September 30, 2000, we have recognized an insignificant amount of total
revenue from professional services.

Approximately $9.6 million and $3.0 million at September 30, 2000 and
December 31, 1999, respectively, included in the accounts receivable balance is
unbilled due to customer payment terms.

Gross exchange transaction sales are comprised of product sales, net of
returns and allowances. Product sales typically involve electronic components
and hardware. Revenues are recognized when the products are shipped to
customers. We reflect gross revenues and related product costs of exchange
transactions in our consolidated financial statements because we take title to
the products exchanged and assume the risk of loss in such transactions.
Additionally, we are exposed to both inventory and credit risk related to the
execution of the transactions. Net exchange revenues, as shown in our
consolidated statements of operations, are gross exchange transaction sales,
less associated transaction costs, which consist primarily of resale inventory
purchases and freight charges. We record a reserve for exchange sales returns at
the time of shipment based on estimated return rates.

In January 2000, we adopted Emerging Issues Task Force ("EITF") No. 99-17,
Accounting for Barter Advertising Transactions. Pursuant to the consensus
reached by the EITF, barter transactions are recorded at the lower of the
estimated fair value of the goods or services received or the estimated fair
value of the advertisements given, based on historical cash transactions. Barter
revenue is recognized when the advertising impressions are delivered to the
customer and advertising expense is recorded when the advertising impressions or
other services from the customer. If we receive the advertising impressions or
other services from the customer prior to our delivery of the advertising
impressions, a liability is recorded, and if we deliver the advertising
impressions to the customer prior to receiving the advertising impressions or
other services, a prepaid expense is recorded on the consolidated balance
sheets. For the three months ended September 30, 2000 and 1999, we recognized
approximately $0.8 million and $1.1 million of advertising revenues,
respectively, and $1.7 million and $1.2 million of advertising expenses,
respectively, from barter transactions. For the nine months ended September 30,
2000 and 1999, we recognized approximately $6.6 million and $2.4 million of
advertising revenues, respectively, and $6.0 million and $1.9 million of
advertising expenses, respectively, from barter transactions. We have recorded
approximately $1.4 million and $1.0 million in prepaid expenses related to
barter transactions as of September 30, 2000 and December 31, 1999,
respectively.

Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share
(in thousands, except for per share amounts)

Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive net loss per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, including incremental common
shares

8
<PAGE> 9
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issuable upon the exercise of stock options and warrants (using the treasury
stock method) and the conversion of our 5 1/4% convertible subordinated
debentures and our Series A 6.00% convertible redeemable preferred stock (using
the if-converted method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive. Common stock issued upon the
conversion of the convertible notes given as consideration in connection with
the purchase of NECX was included in the calculation from the date of
acquisition in December 1999 because the related securities were accounted for
as equity.

Pro forma net loss per share for the nine months ended September 30, 1999
is computed using the weighted average number of common shares outstanding,
including common equivalent shares from the convertible preferred stock issued
prior to our initial public offering ("IPO") (using the if-converted method),
which converted automatically into common stock upon the consummation of the
IPO, as if converted at the original date of issuance, for both basic and
diluted net loss per share, even though inclusion is anti-dilutive.

The following table sets forth the reconciliation between the weighted
average shares outstanding for basic and diluted and pro forma net loss per
share computations:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding, basic and
diluted....................................... 86,616 69,243 81,508 59,192
====== ====== ======
Effect of convertible preferred stock........... 5,706
------
Weighted average shares outstanding, pro forma
basic and pro forma diluted................... 64,898
======
</TABLE>

The following table sets forth the computation of net loss per share:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
BASIC AND DILUTED NET LOSS PER SHARE
Numerator: Net loss attributable to
common shareholders.................. $(76,014) $(25,827) $(121,070) $(38,196)
Denominator: Weighted average shares
outstanding basic and diluted........ 86,616 69,243 81,508 59,192
Basic and diluted net loss per share... $ (0.88) $ (0.37) $ (1.49) $ (0.65)
======== ======== ========= ========

PRO FORMA BASIC AND PRO FORMA DILUTED
NET LOSS PER SHARE
Numerator: Net loss attributable to
common shareholders.................. $(38,196)
Denominator: Weighted average shares
outstanding pro forma basic and pro
forma diluted........................ 64,898
Pro forma basic and pro forma diluted
net loss per share................... $ (0.59)
========
</TABLE>

The common stock equivalents resulting from the exercise of outstanding
options and warrants and the conversion of the Series A 6.00% convertible
redeemable preferred stock and the 5 1/4% convertible subordinated debentures
are anti-dilutive and are excluded from the calculations for the three and nine
month periods ended September 30, 2000 and September 30, 1999. Additionally, pro
forma basic and pro forma diluted net loss per share are applicable only for the
nine months ended September 30, 1999, since the convertible

9
<PAGE> 10
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

preferred stock that was issued prior to our IPO, and is considered in the
calculation was converted at the IPO date and has no effect on periods
subsequent to the year ended December 31, 1999.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for
Derivatives and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS No. 133, as amended by SFAS Nos. 137 and 138, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We are currently analyzing the potential impact of SFAS No. 133 on our results
of operations, financial position and cash flows.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements (as recently amended by SAB Nos.
101A and 101B), which must be implemented in the quarter ending December 31,
2000. In anticipation of the adoption of SAB No. 101, we have analyzed our
revenue recognition policies for our current revenue streams in light of the
SEC's guidance. We believe that our current revenue recognition policies and
practices conform to both generally accepted accounting principles and the
guidance provided in SAB No. 101.

At its July 19-20, 2000 meeting, the EITF reached a consensus on Issue No.
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Issue No.
99-19 addressed when a vendor should report revenue as the gross amount billed
to a customer versus the net amount earned. At the meeting, the EITF affirmed,
as a consensus, the tentative conclusion reached at its May 17-18, 2000 meeting,
with minor modifications to the indicators that assist in determining the
appropriate recognition methodology. The EITF amended the consensus to allow the
adoption of Issue No. 99-19 to mirror the required timing for the implementation
of SAB No. 101. We believe that our current revenue recognition policies and
practices conform to the consensus reached by the EITF on this issue.

(2) ACQUISITIONS

On July 13, 2000, NECX, a wholly-owned subsidiary of VerticalNet, acquired
substantially all of the assets and assumed certain of the liabilities of F&G
Capital, Inc. d/b/a American IC Exchange ("AICE") for shares of our common
stock. We agreed to pay additional consideration (payable in shares of our
common stock) upon the achievement of negotiated financial and operating
targets. The acquisition was accounted for as a purchase and the estimated $51.3
million excess of purchase price over the fair value of the tangible net assets
acquired was allocated to identifiable intangible assets and goodwill in the
amounts of approximately $18.7 and $32.6 million, respectively. AICE was a
privately held market maker for the electronic component and hardware markets,
focusing primarily on memory and memory module products. The results of
operations from AICE are not material to our consolidated financial position or
results of operations. The allocation of purchase price is based on preliminary
estimates that may be revised at a later date.

Goodwill and other intangible assets are amortized using the straight-line
method from the date of acquisition over the period of the expected benefits,
which ranges from three to five years and two to five years, respectively.
Amortization expense for the three months ended September 30, 2000 and 1999 and
the nine months ended September 30, 2000 and 1999 is $53.7 million, $2.1
million, $124.5 million and $2.7 million, respectively.

The following unaudited pro forma financial information presents the
combined results of operations of VerticalNet, Techspex, LabX, CertiSource,
Isadra, NECX, RW Electronics and Tradeum (our material acquisitions) as if the
acquisitions occurred on January 1, 1999, after giving effect to certain
adjustments,

10
<PAGE> 11
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

including amortization expense. We completed the Techspex, LabX, CertiSource,
Isadra and NECX acquisitions in the fiscal year ended December 31, 1999 and the
RW Electronics and Tradeum acquisitions in the first quarter of fiscal year
2000. The unaudited pro forma financial information does not necessarily reflect
the results of operations that would have occurred had VerticalNet, Techspex,
LabX, CertiSource, Isadra, NECX, RW Electronics and Tradeum constituted a single
entity during such periods.

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, ------------------------
1999 2000 1999
-------------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
Combined revenues.............................. $ 19,504 $ 164,961 $ 51,438
Net loss....................................... (74,440) (165,425) (233,928)
Net loss per share............................. (0.98) (2.00) (3.51)
</TABLE>

(3) AVAILABLE-FOR-SALE INVESTMENTS

We account for certain investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. These
investments are classified as available-for-sale as of the balance sheet date
and are reported at fair value, with unrealized gains and losses, net of tax,
recorded in shareholders' equity. Realized gains or losses and permanent
declines in value, if any, on available-for-sale securities are reported in
other income (expense), as incurred.

As of September 30, 2000, our available-for-sale equity holdings had a fair
market value of $62.4 million. Additionally, investments in corporate and
government obligations with fair market values of $35.6 million and $20.2
million as of September 30, 2000 are included in short-term and long-term
available-for-sale investments, respectively.

(4) LONG-TERM INVESTMENTS AND OTHER LONG-TERM LIABILITIES

In July 2000, we entered into forward sale contracts relating to our
investment in Ariba, Inc. ("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. The number of Ariba shares to be delivered
at maturity may vary depending on the then market price of Ariba's common stock
subject to our option to deliver the cash value of such shares. The fair value
of our Ariba shares at September 30, 2000 was approximately $61.1 million and is
included in long-term investments.

The fair value of the obligation in connection with the forward sale is
$52.4 million as of September 30, 2000 and is reflected in other long-term
liabilities. The initial cost of the transaction, approximately $5.0 million, is
being amortized over the life of the agreement in interest income, net.

(5) COST METHOD INVESTMENTS

We hold equity instruments of privately-held companies for business and
strategic purposes. These investments are included in other assets and are
accounted for under the cost method since our ownership percentage is less than
20% and we do not have the ability to exercise significant influence over the
investees. For these non-quoted investments, our policy is to review regularly
the assumptions underlying the operating performance and cash flow forecasts in
assessing the recoverability of the carrying values and to identify and record
impairment losses on long-lived assets when events and circumstances indicate
that such assets might be impaired. During the three months ended September 30,
2000, we recorded a $1.0 million impairment charge which is included in other
income (expense) for an other than temporary decline in the fair value of

11
<PAGE> 12
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

one investment. As of September 30, 2000, investments held at cost of
approximately $16.8 million are included in other assets in the consolidated
balance sheets.

(6) EQUITY METHOD INVESTMENTS

We have investments in companies whose results are not consolidated, but
over whom we exercise significant influence. These investments are accounted for
under the equity method of accounting. Whether we exercise significant influence
with respect to a particular investment depends on an evaluation of several
factors including, among others, representation on the investee's board of
directors, as well as our overall ownership level of the investee, which is
generally a 20% to 50% interest in the voting securities of the investee,
including voting rights associated with our holdings in common, preferred and
other convertible instruments in the investee. Under the equity method of
accounting, our share of the earnings or losses of the investee is reflected in
our consolidated statements of operations. The aggregate carrying value of our
equity method investments, which are included in other assets, was $20.2 million
at September 30, 2000. Our net equity income from affiliates, included in other
income (expense), is approximately $0.2 million and $0.7 million for the three
and nine months ended September 30, 2000, respectively.

In July 2000, we formed a new joint venture with Softbank Commerce Corp., a
wholly-owned subsidiary of Softbank Corporation. We contributed $1.5 million of
cash for a 40% ownership in the joint venture, which is being accounted for
using the equity method. The goal of the new company, called VerticalNet
Kabushiki Kaisha ("VerticalNet Japan"), is to develop, maintain and operate
Japanese language vertical trade communities in Japan. We are obligated to
contribute a maximum of 1.2 billion Yen to the joint venture over the next two
years.

In addition to VerticalNet Japan, our other equity method investments
include a 56% ownership in VerticalNet Europe B.V., a 50% ownership interest in
Electronic Commodity Exchange Asia Pte., Ltd., a 40% ownership interest in
PaintandCoatings.com Inc. and a 50% ownership interest in e-Catalysts, Inc.

(7) MICROSOFT RELATIONSHIP

In March 2000, we entered into a definitive agreement with Microsoft with
respect to a commercial relationship. The commercial relationship with Microsoft
has a three-year term during which Microsoft has committed to purchase and then
distribute to third-party businesses at least 80,000 of our storefronts and
e-commerce centers. We will assist Microsoft in distributing 30,000 of these
storefronts and e-commerce centers. Microsoft has committed to pay us a minimum
of approximately $161.9 million in the aggregate over the term for the
storefronts and e-commerce centers. Microsoft will provide the storefronts and
e-commerce centers it purchases from us to Microsoft's business customers for a
12-month subscription period. For each customer, we will build the storefront or
e-commerce center on one of our vertical trade communities. We will pay
Microsoft an aggregate of $60.0 million during the term for advertising and
promotional placements in The Microsoft Network and on Microsoft's bCentral
Website and, if the pace of Microsoft's distribution of storefronts and
e-commerce centers does not meet agreed upon goals, we will pay additional
amounts for advertising and promotional placements not to exceed $15.0 million
in the aggregate.

Microsoft has committed to pay us an aggregate of $60.0 million during the
term of the agreement for advertising and promotional placements in our vertical
trade communities. We have committed to pay Microsoft an aggregate of $18.5
million over the term to be directed toward the development and enhancement of
products and services relating to the business-to-business marketplace and
database software technology.

We will use commercially reasonable efforts during the term to adopt and
use Microsoft products to operate our vertical trade communities when
appropriate and feasible. We have committed to pay Microsoft

12
<PAGE> 13
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

an aggregate of $56.5 million over the term towards the licensing of Microsoft
products and provision of Microsoft services.

In April 2000, Microsoft invested $100.0 million in VerticalNet. Through
the nine months ended September 30, 2000, we received $50.7 million from
Microsoft, of which approximately $18.0 million was recognized as advertising
and e-enablement revenue and approximately $32.7 million remains in deferred
revenue on the consolidated balance sheets. Additionally, during the nine months
ended September 30, 2000, we paid $21.5 million to Microsoft, of which
approximately $7.5 million was expensed for advertising, licensing and support
services, and approximately $14.0 million is recorded as a prepaid expense for
future advertising, licensing of Microsoft products and the use of Microsoft
services.

(8) LINE OF CREDIT AND SECURITIZATION FACILITY

Line of Credit

In February 2000, NECX entered into a $33.0 million revolving line of
credit, which was amended in March 2000 to increase the line amount to $50.0
million. In conjunction with the completion of a securitization facility in
September 2000, we repaid our outstanding line of credit borrowing and
terminated the agreement.

Securitization Facility

In September 2000, NECX entered into a five year $75.0 million agreement to
sell, on an ongoing basis, a pool of its trade accounts receivable to a wholly
owned bankruptcy-remote special purpose subsidiary (the "SPS"). The SPS has sold
and, subject to certain conditions, may from time to time sell, an undivided
ownership interest in the pool of receivables to a financial institution (the
"Conduit"). Under the terms of the agreement, new receivables are added to the
pool as collections reduce previously sold receivables. NECX services,
administers and collects the receivables on behalf of the SPS and the Conduit.
Proceeds of approximately $75.0 million were received as of September 30, 2000
from the sale of receivables and the SPS has recorded a net loss on the sale of
approximately $0.4 million from the related sale to the Conduit. The proceeds,
which were used to repay the NECX line of credit and for working capital
purposes, are reflected as operating cash flows in the accompanying consolidated
statement of cash flows.

(9) COMMITMENTS AND CONTINGENCIES

We have entered into noncancelable obligations with several content service
providers, Internet search engines and strategic partners. Under these
agreements, exclusive of the Microsoft agreement discussed in Note 7, our
commitments as of September 30, 2000 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000........................................................ $2,092
2001........................................................ 8,370
2002........................................................ 4,133
2003........................................................ 542
</TABLE>

We are a party to various legal proceedings and claims that have arisen in
the ordinary course of business. In the opinion of management, the amount of any
ultimate liability with respect to these actions will not materially affect our
financial position, results of operations or cash flows.

13
<PAGE> 14
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) PREFERRED STOCK, WARRANTS AND CONVERTIBLE DEBT

Issuance of Series A 6.00% Convertible Redeemable Preferred Stock

In April 2000, Microsoft made a $100.0 million equity investment in
VerticalNet through the purchase of 100,000 shares of our Series A 6.00%
convertible redeemable preferred stock ("Series A Preferred Stock"), which are
initially convertible into 1,151,080 shares of our common stock. On April 1,
2010, at the election of the holder of the Series A Preferred Stock, we shall be
required to redeem all outstanding shares of Series A Preferred Stock at a
specified price. In addition, at our option, each share of Series A Preferred
Stock will be subject to redemption at a calculated price using cash or our
common stock if certain conditions are met. Because we can elect to redeem the
preferred stock for common equity, it has been classified as an equity
instrument in the consolidated financial statements. Microsoft is entitled to
registration rights and has the right to nominate one member of our board of
directors, which it has nominated. In addition, Microsoft received warrants
entitling Microsoft to purchase 1,500,000 shares of our common stock at an
exercise price of $69.50 per share, subject to adjustment under certain
circumstances.

Based on an independent valuation of the Series A Preferred Stock and the
warrants issued to Microsoft, fair values of $89.5 million and $18.1 million
were recorded, respectively. The fair value of the warrants was recorded as
additional paid-in capital. The excess fair value over the actual cash received
of approximately $7.6 million was recorded as a deferred cost in other assets
and is being amortized to expense on a straight-line basis over the period of
the commercial agreement, since this excess of the fair value of the Series A
Preferred Stock and warrants over the $100.0 million received is in exchange for
the use of certain Microsoft trademarks and service marks.

Holders of the Series A Preferred Stock are entitled to cumulative
preferred dividends accumulating at a rate of 6.00% of the liquidation
preference ($1,000/share) per year, payable quarterly in arrears on each January
1, April 1, July 1, and October 1 of each year. As of September 30, 2000,
cumulative dividends of approximately $3.0 million had been earned by the holder
of the Series A Preferred Stock. Dividends may be paid in cash, additional
Series A Preferred Stock or common stock. In August 2000, cumulative dividends
of approximately $1.5 million were paid to Microsoft through the issuance of
shares of Series A Preferred Stock.

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

Conversion of Convertible Subordinated Debentures

In April 2000, approximately $93.3 million of our 5 1/4% convertible
subordinated debentures due 2004 were converted into 4,664,750 shares of common
stock. In connection with the conversion, we made an inducement payment of
approximately $11.2 million to the related debt holders. Approximately $2.9
million of deferred debt offering costs attributable to the portion of debt
converted to equity were recorded as a reduction of additional paid-in capital.

(11) OTHER INCOME (EXPENSE)

Other income (expense) for the nine months ended September 30, 2000
includes a $79.9 million net gain on the receipt and subsequent partial sale of
Ariba shares received in exchange for our holdings in Tradex Technologies, Inc.
and the $11.2 million inducement payment made in connection with the conversion
of our 5 1/4% convertible subordinated debentures. Additionally, other income
(expense) for the three and nine months ended September 30, 2000 includes a $1.0
million impairment charge for an other than temporary

14
<PAGE> 15
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

decline in the fair value of a cost method investment and the loss on the sale
of receivables under our securitization facility.

(12) SEGMENT INFORMATION

In September 2000, we announced our plans to organize the business into
three strategic units: VerticalNet Markets, VerticalNet Solutions and
VerticalNet Exchanges. Due to the early stage of VerticalNet Solutions'
formation and our need to determine the allocation of resources between
VerticalNet Markets and VerticalNet Solutions, management will continue to
operate and measure the performance of VerticalNet Markets and VerticalNet
Solutions as one unit for the remainder of 2000. Management expects to start
evaluating VerticalNet Solutions as a separate segment in the first quarter of
2001.

Based on management's current focus and resource allocation, we have
classified our results in two segments: VerticalNet Markets and VerticalNet
Exchanges. The VerticalNet Markets segment includes revenue generating
activities associated with the vertical trade communities, including
e-enablement, e-commerce, advertising and services. This segment also includes
professional services. The VerticalNet Exchanges segment includes all revenue
generating activities associated with NECX's market-making for the electronic
components and hardware markets.

The reporting segments follow the same accounting policies used for our
consolidated financial statements. Management evaluates the segments'
performance primarily on net revenues generated and income (loss) before
non-cash, other non-recurring items and preferred stock dividends. Non-cash and
other non-recurring items reflected in the reconciling items column is composed
primarily of amortization expense for the three and nine months ended September
30, 2000. Additionally, the nine months ended September 30, 2000 includes an in
process research and development charge, a conversion inducement payment and a
net gain on investment relating to the receipt and subsequent partial sale of
Ariba shares of $10.0 million, $11.2 million and $79.9 million, respectively.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------
VERTICALNET VERTICALNET RECONCILING
MARKETS EXCHANGES ITEMS TOTAL
----------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Exchange revenues, net....................... $ -- $ 39,278 -- $ 39,278
E-enablement, e-commerce, advertising and
services revenues.......................... 34,455 -- -- 34,455
-------- -------- ------- ----------
Combined revenues............................ 34,455 39,278 -- 73,733
Net income (loss)............................ (29,946) 12,217 (56,763) (74,492)
Capital expenditures, including capitalized
software costs............................. 11,077 6,754 -- 17,831
Segment assets............................... 777,463 306,224 -- 1,083,687
</TABLE>

15
<PAGE> 16
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------
VERTICALNET VERTICALNET RECONCILING
MARKETS EXCHANGES ITEMS TOTAL
----------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Exchange revenues, net....................... -- 82,979 -- 82,979
E-enablement, e-commerce, advertising and
services revenues.......................... 71,763 -- -- 71,763
-------- -------- ------- ----------
Combined revenues............................ 71,763 82,979 -- 154,742
Net income (loss)............................ (69,077) 20,348 (69,369) (118,098)
Capital expenditures, including capitalized
software costs............................. 24,712 14,467 -- 39,179
Segment assets............................... 77,463 306,224 -- 1,083,687
</TABLE>

Prior to the acquisition of NECX, our operations were conducted solely in
the VerticalNet Markets segment. Accordingly, no segment information has been
presented for the three and nine months ended September 30, 1999.

(13) APPOINTMENT OF CHIEF EXECUTIVE OFFICER

On July 27, 2000, Joseph Galli, Jr. joined VerticalNet as president, chief
executive officer and a member of the board of directors. Mr. Galli succeeded
Mark L. Walsh, who was appointed chairman of VerticalNet. We granted 3.0 million
stock options to Mr. Galli at an exercise price equal to $7.00 below the closing
per share price on the date of grant. This grant resulted in $21.0 million of
deferred compensation expense, which we are recognizing over the vesting period
of the options. Mr. Galli's options will vest over a four-year period, with 28%
of the options becoming exercisable on July 28, 2001, and 2% of the options
becoming exercisable each month thereafter, subject to his continued employment
with VerticalNet.

On July 27, 2000, we advanced $4.0 million to Mr. Galli upon the
commencement of his employment with VerticalNet in the form of a non-interest
bearing interest loan until September 1, 2000, at which time the note was
cancelled. On September 1, 2000, we loaned him approximately $1.4 million under
a note bearing interest at 6.5% per annum with a term expiring on November 10,
2000, on which date he repaid in full all principal and accrued interest on the
note.

(14) SUBSEQUENT EVENTS

Agreement with Sumitomo

On October 31, 2000, VerticalNet and Sumitomo Corporation entered into a
definitive agreement under which Sumitomo will make a $30.0 million equity
investment in VerticalNet through the purchase of shares of our common stock,
subject to the receipt of requisite regulatory approvals and the fulfillment of
customary closing conditions. Under the agreement, Sumitomo may not transfer the
purchased shares for one year from the closing date of the transaction. Sumitomo
was also granted limited demand and piggyback registration rights exercisable
after the first anniversary of the closing.

As part of our agreement with Sumitomo, the parties agreed to cooperate
with each other to explore the possible creation of additional Japanese or Asian
exchange joint ventures. In addition, Sumitomo may in the future participate as
an equity partner in other international operations of VerticalNet, and may
license or distribute technology, products and services of VerticalNet Solutions
and VerticalNet Markets. However, the parties have not reached, and may never
enter into, any definitive agreement concerning any additional commercial
relationship between them.

16
<PAGE> 17
VERTICALNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Proposed Acquisition of SierraCities.com Inc.

On November 6, 2000, we entered into an agreement to acquire
SierraCities.com Inc. for $7.00 per SierraCities share, or an aggregate of
$133.0 million, payable in our common stock, subject to a collar provision. The
transaction will take the form of an exchange offer, followed by a merger in
which our common stock will be issued at the same exchange ratio paid in the
exchange offer. The transaction is subject to the tender of two-thirds of the
outstanding SierraCities shares and other customary conditions. The parties have
agreed to commence the exchange offer no later than November 17, 2000.

17
<PAGE> 18

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

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 or
current fact may be deemed forward-looking statements. Words such as "may,"
"will," "would," "should," "could," "estimates," "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 technology in our
three strategic business units; the integration of our traditional off-line
exchange business with an on-line exchange; the growth of the Internet and
business-to-business advertising, e-commerce and software licensing and related
professional and business operations services; the strategies underlying our
business objectives; the completion of pending transactions; our anticipated
performance of our obligations or the anticipated performance of the obligations
of those parties with which we have contractual relationships; our sales and
marketing strategies and efforts; the development of our various revenue
sources, including on-line revenues and revenues from software licensing and
related services; the value of our equity interests in other companies; our
liquidity and capital resources; and the impact of our acquisitions and
strategic relationships 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, competition in the market for business-to-business
e-commerce market in general and in our specific target markets; changes in
prevailing interest rates and the availability and terms of equity and debt
financing to fund the growth of our business; inflation; changes in costs of
goods and services; economic conditions in general and in our specific target
markets; changes in preferences and tastes of users, buyers and suppliers;
demographic changes; changes in, or failures to comply with, federal, state,
local or foreign laws and regulations; the evolution of our business strategy
and revenue model; 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.

The following discussion of our financial condition and results of
operations should also be read in conjunction with the financial statements and
related notes included elsewhere in this report.

OVERVIEW

Business Description

In September 2000, we announced the organization of our business into three
strategic business units: VerticalNet Markets, VerticalNet Solutions and
VerticalNet Exchanges.

VerticalNet Markets includes 57 industry-specific digital marketplaces
designed as online vertical trading communities and provides hosted e-commerce
and community capabilities for corporate divisions and small and medium sized
businesses. These vertical trade communities act as industry-specific
comprehensive sources of information, interaction and electronic commerce; they
offer product information, industry news, requests for proposals, directories,
classifieds, job listings, discussion forums, a variety of electronic commerce
opportunities for buyers and sellers, and other services, such as on-line
professional education courses and virtual trade shows. Each vertical trade
community is individually branded, focuses on a single business sector and
caters to individuals with similar professional interests. The vertical trade
communities are designed to attract technical and purchasing professionals with
specialized product requirements and purchasing authority or influence.

18
<PAGE> 19

VerticalNet Solutions integrates the technologies of VerticalNet Markets
with recent technology acquisitions of Tradeum and Isadra. VerticalNet Solutions
builds digital marketplaces for industry alliances, independent Net market
makers and global 2000 enterprises. VerticalNet Solutions offers the
VerticalNet(TM) eMarketplace Suite which is a comprehensive and innovative open
platform solution that includes community, content and market design tools,
multiple market mechanisms and transaction types, multi-party system interaction
and a broad range of buy-and sell-side services. This eMarketplace Suite is an
end-to-end solution that supports auctions, catalogs, exchanges, RFPs, RFQs and
structured negotiations. VerticalNet Solutions also offers customers a complete
set of professional service offerings, including front-end design,
implementation, and integration services and back-end market hosting. Due to the
early stage of VerticalNet Solutions formation and our need to determine the
allocation of resources between VerticalNet Markets and VerticalNet Solutions,
management will continue to operate and measure the performance of VerticalNet
Markets and VerticalNet Solutions as one unit for the remainder of 2000.
Management expects to start evaluating VerticalNet Solutions as a separate unit
in the first quarter of 2001.

VerticalNet Exchanges focuses on trading electronic components and hardware
in open and spot markets. NECX acts as a third party intermediary, purchasing
electronic components and hardware from various vendors for resale to foreign
and domestic companies. The exchange operates quickly and anonymously to match
buyers' and suppliers' needs, providing a solution to inventory imbalances that
result from over-capacity or shortages within existing contractual
relationships. NECX has overseas sales operations in Sweden, Ireland, Japan and
Korea that serve European and Asian exchange customers.

E-enablement and e-commerce revenues include storefront and e-commerce
center fees, Web site development fees and e-commerce fees. Storefront and
e-commerce center fees are recognized ratably over the period of the contract.
Web site development fees are recognized as earned. E-commerce fees are
generated through auctions, education services, bookstores and e-commerce
centers. We sell books, software, videos, on-line classes and other goods
offered by third parties. Additionally, we offer auction sites with direct and
indirect goods posted by inventory liquidators. E-commerce fees, whether in the
form of transaction fees, percentage of sale fees or minimum guaranteed fees,
are recognized when earned. E-commerce fees from educational courses are
recognized in the period in which the course is completed. E-commerce fees from
books and other product sales are recognized in the period in which the products
are shipped. Auction transaction fees are recognized when the auction is
successfully concluded.

Exchange revenues from NECX operations are generated from the traditional
off-line and on-line sale of electronic components and hardware. For the three
months ended September 30, 2000, on-line exchange transactions accounted for
approximately $2.4 million of the total net exchange revenue. We expect on-line
exchange transactions to increase as NECX continues to bring its traditional
off-line exchange operations on-line and as the on-line business acquired in the
AICE transaction (see footnote 2), continues to grow as part of the affiliated
NECX business. Exchange revenues are recognized when products are shipped to
customers. We reflect gross revenues and related product costs of exchange
transactions in our consolidated financial statements because NECX takes title
to the products exchanged and assumes the risk of loss in such transactions.
Additionally, NECX is exposed to both inventory and credit risk related to the
execution of the

19
<PAGE> 20

transactions. We believe that the amount of net revenue resulting from exchange
transactions is an important performance measure for the exchange business and
have presented this amount as a subtotal in the consolidated statements of
operations.

For the three and nine months ended September 30, 2000, a substantial
portion of our total revenues were derived from the exchange business, as
compared to periods prior to our acquisitions of NECX, RW Electronics and AICE,
in which the majority of our revenues were derived from advertising. Although we
expect that the exchange business will continue to represent a substantial
portion of total revenues, e-enablement and e-commerce revenues are expected to
increase as we continue to distribute storefronts and e-commerce centers under
our commercial agreement with Microsoft and market new e-commerce enablement
products to our VerticalNet Markets customers.

In connection with the anticipated revenues from software licensing and
implementation services, we have adopted SOP 97-2, Software Revenue Recognition,
which 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. License revenue allocated to software products generally
is recognized upon delivery of the software products or ratably over a
contractual period if unspecified software products are to be delivered during
that period. Revenue allocated to hosting and maintenance services is recognized
ratably over the contract term and revenue allocated to professional services is
recognized as the services are performed. If the professional services provided
are essential to the functionality or are for significant production,
modification or customization of the software products, both the software
product revenue and service revenue are recognized in accordance with the
provisions of SOP 81-1, Accounting for Performance of Construction Type and
Certain Production Type Contracts. Revenues and costs are recognized based on
the labor hours incurred to date compared to total estimated labor hours over
the term of the contract.

At September 30, 2000, we had an accumulated deficit of $190.9 million. The
table below illustrates the loss attributable to common shareholders during the
periods set forth:

<TABLE>
<CAPTION>
NET LOSS
PERIOD (IN MILLIONS)
------ -------------
<S> <C>
Three months ended September 30, 2000....................... $ 76.0
Nine months ended September 30, 2000........................ 121.1
Year ended December 31, 1999................................ 53.5
Year ended December 31, 1998................................ 13.6
Year ended December 31, 1997................................ 4.8
</TABLE>

The net losses and accumulated deficit have resulted primarily from our
lack of revenues relative to the costs of our significant infrastructure
expansion, the costs related to acquisitions, including amortization expense and
in-process research and development charges, and other costs incurred for the
development of vertical trade communities and additional community features, as
well as sales and marketing for the vertical trade communities and other
businesses we have acquired. We expect to continue to incur significant
operating losses for the foreseeable future. Although we have experienced
greater revenue growth in recent periods, such growth may not be sustainable and
should not be considered indicative of future performance. We may never achieve
significant revenues or generate an operating profit.

Recent Acquisition

20
<PAGE> 21

products. The results of operations from AICE are not material to our
consolidated financial position or results of operations (see Note 2).

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999

Revenues. Combined revenues were $154.7 million for the nine months ended
September 30, 2000 and $10.7 million for the nine months ended September 30,
1999. The increase in revenues resulted primarily from:

- strong revenues from NECX's exchange operations, including the additional
revenues that resulted from our acquisitions of RW Electronics and AICE
in 2000;

- the Microsoft commercial agreement, which was primarily responsible for
the increase in the number of storefronts on our vertical trade
communities from approximately 2,676 as of September 30, 1999 to
approximately 13,472 as of September 30, 2000; and

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

Our exchange business generated $83.0 million of net exchange revenues or
53.6% of our combined revenues, for the nine months ended September 30, 2000. At
September 30, 2000, we had deferred revenues of $57.2 million, associated
primarily with e-enablement and advertising revenue. For the nine months ended
September 30, 1999, advertising revenues had accounted for the majority of our
revenues.

Editorial and Operational Expenses. Editorial and operational expenses
consist primarily of salaries and benefits of operating and editorial personnel,
product costs (including costs of professional services provided to customers),
depreciation, amortization of internally developed software and other related
operating costs. Editorial and operational expenses were $28.8 million for the
nine months ended September 30, 2000 and $5.4 million for the nine months ended
September 30, 1999. Expenses increased by:

- $9.3 million for salaries and benefits of operating and editorial
personnel;

- $8.4 million for direct product costs, including costs of professional
services provided to our VerticalNet Markets and VerticalNet Solutions
customers; and

- $5.7 million for other related operating costs.

Increases were primarily attributable to additional personnel and direct
product costs. Additional personnel were required to provide services to an
increased number of customers as a result of our Microsoft arrangement, as well
as maintaining the increasing number of features and functionalities that have
been added to our vertical trade communities and horizontal business services.
Direct product costs have increased due to our growth in the asset remarketing
business in which, under certain circumstances, we take title to the goods being
sold. We expect editorial and operational costs to continue to increase as we
hire additional operational personnel to accommodate VerticalNet Markets' growth
from the Microsoft relationship, the development of new e-commerce enabling
products and features and the continuing growth of our horizontal business
services. Additionally, we expect professional services costs to increase as we
grow the VerticalNet Solutions business.

Product Development Expenses. Product development expenses consist
primarily of salaries and benefits, consulting expenses and related
expenditures. Product development expenses were $22.1 million for the nine
months ended September 30, 2000 and $4.9 million for the nine months ended
September 30, 1999. Expenses increased by:

- $9.4 million for salaries and benefits;

- $5.4 million for consulting expenses; and

- $2.4 million for other expenditures.

21
<PAGE> 22

This increase in product development expenses resulted primarily from
increased staffing and consulting costs to develop and enhance the features,
content and services of our vertical trade communities, as well as developing
VerticalNet eMarketplace Suite products that incorporate VerticalNet Markets'
community building technology with the acquired technology of Tradeum and
Isadra. We expect product development expenses to increase significantly in the
future as continued investment in product development is critical to attaining
our goals. During the nine months ended September 30, 2000, we capitalized
approximately $10.8 million of certain internal software development and
external consulting costs as required by SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. We also capitalized
certain consulting and internal development costs of approximately $4.3 million
for software to be marketed externally as required by SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.

Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and commissions for sales and marketing personnel,
advertising and travel and entertainment, including the costs of attending trade
shows. Sales and marketing expenses were $93.8 million for the nine months ended
September 30, 2000 and $17.1 million for the nine months ended September 30,
1999. Expenses increased by:

- $21.7 million for advertising, including barter expense;

- $41.8 million for salaries, commissions and benefits; and

- $13.2 million for travel and entertainment expenses (including trade show
attendance) and other expenses.

These increases resulted primarily from an increased number of sales and
marketing personnel across our business units, increased sales commissions,
especially in relation to our growth in exchange revenues, and increased
expenses related to promoting the new businesses and services we have acquired
or created. NECX, including RW Electronics and AICE, incurred approximately
$38.9 million in sales and marketing expenses, primarily related to advertising
of $6.4 million and to salaries and commissions of $28.9 million. We expect
sales and marketing expenses will continue to grow significantly as we pursue an
aggressive growth strategy, hire additional sales and marketing personnel, incur
increased commission expenses as revenues continue to increase and focus on
continued advertising and branding for our businesses.

General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for our executive,
administrative, finance, legal, human resources and business development
personnel, as well as support services and professional service fees. General
and administrative expenses were $61.6 million (including $1.5 million of
deferred compensation expense) for the nine months ended September 30, 2000 and
$6.4 million for the nine months ended September 30, 1999. Expenses increased
by:

- $30.3 million for salaries and benefits;

- $8.4 million for professional fees;

- $6.5 million for facility costs; and

- $10.0 million for other general and administrative costs.

These increases resulted primarily from increased staffing levels, higher
facility costs, including supporting the facilities of newly acquired
businesses, and professional fees to support the growth of our infrastructure.
NECX, including RW Electronics and AICE, incurred approximately $24.6 million in
general and administrative expenses, primarily related to salaries and benefits
of $14.3 million. We expect to hire additional support personnel as we continue
to expand our business units.

Amortization Expense. Amortization expense primarily reflects the
amortization of goodwill from purchase business combinations. Also included in
amortization expense is the amortization of identified intangible assets
acquired in such acquisitions. Amortization periods for goodwill and other
intangible assets range from 30 to 60 months and from 24 to 60 months,
respectively. Amortization expense was $125.6 million (including $1.1 million of
deferred warrant cost expense related to Microsoft) for the nine months ended
September 30, 2000 and $2.7 million for the nine months ended September 30,
1999. The increase in
22
<PAGE> 23

amortization expense is attributable to the acquisitions we completed between
September 30, 1999 and September 30, 2000. Amortization expense is expected to
increase as we continue to acquire companies.

In-Process Research and Development Expense. In March 2000, we incurred a
one-time non-recurring in-process research and development charge of $10.0
million in connection with our acquisition of Tradeum.

Other Income and Expenses: Other income (expenses) includes:

<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Net gain on investments(1).................................. $ 78.9
Conversion payment to debt holders(2)....................... (11.2)
Equity in earnings of affiliates............................ 0.7
Loss on sale of trade receivables(3)........................ (0.4)
------
$ 68.0
======
</TABLE>

---------------
(1) During 1999, we entered into discussions with Tradex Technologies, Inc.
regarding a possible licensing arrangement. Although we could not reach
agreement on the terms of a licensing arrangement, we acquired $1.0 million
of equity in Tradex in July 1999. In March 2000, Tradex was acquired by
Ariba, Inc. and, as a shareholder of Tradex, we received 566,306 shares of
Ariba in exchange for our shares of Tradex. We recorded a gain upon the
receipt of the Ariba common stock and subsequently sold 140,000 shares in
March 2000 at a loss, resulting in a net investment gain of $79.9 million
(see Note 11). Additionally, we recorded an impairment charge of $1.0
million for an other than temporary decline in the fair value of a cost
method investment.

(2) In April 2000, approximately $93.3 million of our 5 1/4% convertible
subordinated debentures were converted into 4,664,750 shares of our common
stock. In connection with the conversion, we made an inducement payment of
approximately $11.2 million to the debt holders (see Note 10).

(3) In September 2000, NECX entered into a $75.0 million trade receivables
securitization facility. We recognized a $0.4 million loss on the sale of
receivables (see Note 8).

Interest Income, Net. Interest income, net of expense, includes income
from temporarily invested cash and cash equivalents and from investments and
expenses related to our financing obligations. Net interest income was $1.0
million (net of $3.8 million of expense) for the nine months ended September 30,
2000 and $1.3 million (net of $0.3 million of expense) for the nine months ended
September 30, 1999. Interest income increased as a result of the cash we
received from the issuance of Series A Preferred Stock in April 2000. We invest
the majority of our cash balances in debt instruments of the United States
Government and its agencies, and in high-quality corporate issuers. Interest
expense increased during the period because of our outstanding convertible debt
and NECX's line of credit borrowings.

Preferred Stock Dividends. As of September 30, 2000, cumulative dividends
of $3.0 million have been earned by the holder of our Series A Preferred Stock.
In August 2000, dividends of $1.5 million were paid to Microsoft through the
issuance of shares of Series A Preferred Stock. The remaining $1.5 million
remains payable as of September 30, 2000. The dividends may be paid in cash,
additional shares of Series A Preferred Stock or common stock, at our option
(see Note 10).

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999

Revenues. Combined revenues were $73.7 million for the three months ended
September 30, 2000 and $5.2 million for the three months ended September 30,
1999. The increase in revenues resulted primarily from:

- strong revenues from NECX's exchange operations, including the additional
revenues that resulted from our acquisitions of RW Electronics and AICE
in 2000;

23
<PAGE> 24

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

Our exchange business generated $39.3 million of net exchange revenues or
53.3% of our combined revenues, for the three months ended September 30, 2000.
For the three months ended September 30, 1999, advertising revenues had
accounted for the majority of our revenues.

Editorial and Operational Expenses. Editorial and operational expenses
were $15.8 million for the three months ended September 30, 2000 and $2.6
million for the three months ended September 30, 1999. Expenses increased by:

- $3.4 million for salaries and benefits of operating and editorial
personnel;

- $6.9 million for direct product costs, including costs of professional
services provided to our VerticalNet Markets and VerticalNet Solutions
customers; and

- $2.9 million for other related operating costs.

Product Development Expenses. Product development expenses were $9.3
million for the three months ended September 30, 2000 and $2.2 million for the
three months ended September 30, 1999. Expenses increased by:

- $4.1 million for salaries and benefits;

- $2.1 million for consulting expenses; and

- $0.9 million for other expenditures.

This increase in product development expenses resulted primarily from
increased staffing and consulting costs to develop and enhance the features,
content and services of our vertical trade communities as well as developing
VerticalNet eMarketplace Suite products. We expect product development expenses
to increase significantly in the future as continued investment in product
development is critical to attaining our goals. During the three months ended
September 30, 2000, we capitalized approximately $5.1 million of certain
internal software development and external consulting costs as required by SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. We also capitalized certain consulting and internal development
costs of approximately $0.8 million for software to be marketed externally as
required by SFAS No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed.

24
<PAGE> 25

Sales and Marketing Expenses. Sales and marketing expenses were $38.2
million for the three months ended September 30, 2000 and $7.9 million for the
three months ended September 30, 1999. Expenses increased by:

- $7.4 million for advertising, including barter expense;

- $18.9 million for salaries, commissions and benefits; and

- $4.0 million for travel and entertainment expenses (including trade show
attendance) and other expenses.

These increases resulted primarily from an increased number of sales and
marketing personnel across our business units, increased sales commissions,
especially in relation to our growth in exchange revenues, and increased
expenses related to promoting the new businesses and services we have acquired
or created. NECX, including RW Electronics and AICE, incurred approximately
$17.3 million in sales and marketing expenses, primarily related to advertising
of $1.9 million and salaries and other commissions of $13.9 million. We expect
sales and marketing expenses will continue to grow significantly, as we pursue
an aggressive growth strategy, hire additional sales and marketing personnel,
incur increased commission expenses as revenues continue to increase and focus
on continued advertising and branding for our businesses.

General and Administrative Expenses. General and administrative expenses
were $30.1 million (including $1.5 million of deferred compensation expense) for
the three months ended September 30, 2000 and $3.1 million for the three months
ended September 30, 1999. Expenses increased by:

- $17.6 million for salaries and benefits;

- $2.7 million for professional fees;

- $3.1 million for facility costs; and

- $3.6 million for other general and administrative costs.

These increases resulted primarily from increased staffing levels, higher
facility costs, including supporting facilities of newly acquired businesses,
and professional fees to support the growth of our infrastructure. NECX,
including RW Electronics and AICE, incurred approximately $10.6 million in
general and administrative expenses, primarily related to salaries and benefits
of $7.1 million. We expect to hire additional support personnel as we continue
to expand our business units.

Amortization Expense. Amortization of goodwill and identified intangible
assets was $54.3 million (including $0.6 million of deferred warrant cost
expense related to Microsoft) for the three months ended September 30, 2000 and
$2.1 million for the three months ended September 30, 1999. The increase in
amortization expense is attributable to the acquisitions we completed between
September 30, 1999 and September 30, 2000. Amortization expense is expected to
increase as we continue to acquire companies.

Other Income and Expenses: Other income (expenses) includes:

<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Loss on investments(1)...................................... $(1.0)
Equity in earnings of affiliates............................ 0.2
Loss on sale of trade receivables(2)........................ (0.4)
-----
$(1.2)
=====
</TABLE>

---------------
(1) During the three months ended September 30, 2000, we recorded an impairment
charge of $1.0 million for the other than temporary decline in the fair
value of a cost method investment.

(2) In September 2000, NECX entered into a $75.0 million trade receivables
securitization facility. We recognized a $0.4 million loss on the sale of
receivables.

25
<PAGE> 26

Interest Income, Net. Interest income, net of expense, was $0.6 million
(net of $0.9 million of expense) for the three months ended September 30, 2000
and $0.5 million (net of $0.1 million of expense) for the three months ended
September 30, 1999. Interest income increased as a result of the cash we
received from the issuance of Series A Preferred Stock. Interest expense
increased during the period because of our outstanding convertible debt and
NECX's line of credit borrowings.

Preferred Stock Dividends. During the three months ended September 30,
2000, cumulative dividends of $1.5 million were earned by, but remain unpaid to,
the holder of our Series A Preferred Stock. The dividends may be paid in cash,
additional shares of Series A Preferred Stock or common stock.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2000, our primary source of liquidity consisted of cash
and highly liquid, high-quality debt instruments acquired primarily with the
proceeds of our issuance of the Series A Preferred Stock and warrants to
Microsoft for $99.9 million (net of issuance costs) in April 2000 (see Note 10)
and our $75.0 million accounts receivables securitization facility (see Note 8).
Our intent is to make the majority of such funds readily available for operating
purposes. At September 30, 2000, we had cash and cash equivalents, short-term
investments and long-term investments totaling approximately $144.7 million,
compared to $75.3 million at December 31, 1999.

Net cash provided by operating activities was $22.6 million for the nine
months ended September 30, 2000. Net cash provided by operating activities
consisted primarily of net operating losses, increases in inventory and prepaid
expenses and a decrease in accounts payable, offset by increases in deferred
revenues and accrued expenses and a decrease in accounts receivable. The large
increase in deferred revenues is related primarily to our commercial agreement
with Microsoft and the decrease in accounts receivable is primarily a result of
the sale of trade receivables under our securitization facility.

Net cash used in investing activities was $79.4 million for the nine months
ended September 30, 2000. Cash from investing activities include the sale and
maturities of available-for-sale securities for $21.1 million (net of purchases
of such securities). Cash used in investing activities included capital
expenditures and capitalized software costs of $39.2 million, investments made
in companies being accounted for under the equity or cost method of $20.8
million, restricted cash for stand by letters of credit of $9.6 million, and
acquisitions of $30.9 million, net of cash acquired.

Net cash provided by financing activities was $130.1 million for the nine
months ended September 30, 2000. Net cash provided by financing activities
consist of net proceeds from the issuance of the Series A Preferred Stock of
$99.9 million, proceeds from the forward sale of our Ariba investment of $47.4
million (see Note 4) and net proceeds from the exercise of employee stock
options and stock purchase plan transactions of $27.7 million. Cash used in
financing activities include payments made for capital leases of $1.6 million
and other debt repayments of $43.4 million including repayments made in
connection with the RW Electronics and AICE acquisitions.

Capital expenditures, including capital leases and capitalized software
costs, were $39.9 million for the nine months ended September 30, 2000. These
expenditures consisted primarily of the purchase of office furniture, computer
hardware, communications equipment and costs capitalized in connection with the
internal development of software. We expect our capital expenditures to increase
as our growth continues. We have generally funded our capital expenditures
through internally generated funds and the use of capital leases and expect to
continue to do so in the foreseeable future.

In September and October of 1999, we completed the sale of an aggregate of
$115.0 million of 5 1/4% convertible subordinated debentures in a private
placement transaction pursuant to Section 4(2) of the Securities Act of 1933, as
amended, resulting in net proceeds of $110.9 million. The debentures have a
maturity date of September 27, 2004 with semi-annual interest payments due on
March 27 and September 27 of each year beginning on March 27, 2000. The
debentures are convertible into shares of our common stock at an initial
conversion price of $20 per share, subject to adjustment under certain
circumstances. On April 7, 2000, the SEC declared effective a registration
statement covering the convertible subordinated debentures

26
<PAGE> 27

and the shares of our common stock underlying the debentures. We may redeem the
debentures if the price of our common stock is above $34 per share for at least
20 trading days during the 30-day trading period ending on the trading day
before we mail notice that we intend to redeem the debentures. If we redeem the
debentures, we must redeem at a price equal to 101.3125% of the principal
amount, pay any accrued but unpaid interest and make an interest make-whole
payment equal to the present value of the interest that would have accrued from
the redemption date though September 26, 2002. In April 2000, certain holders of
the debentures converted approximately $93.3 million of the debentures into
4,664,750 shares of our common stock. We made a conversion inducement payment of
$11.2 million to the holders. We recorded as a reduction of additional paid-in
capital approximately $2.9 million in deferred debt offering costs attributable
to the portion of the debt converted to equity (see Note 10).

In February 2000, NECX entered into a $33.0 million revolving line of
credit. In March 2000, the line of credit was amended to increase the maximum
amount that could be borrowed from $33.0 million to $50.0 million. In
conjunction with the completion of a $75.0 million trade receivable
securitization facility in September 2000, we repaid our outstanding line of
credit borrowing and terminated the agreement.

In March 2000, we entered into an agreement with Microsoft with respect to
a strategic relationship (see Note 7). As part of the strategic relationship, in
April 2000, Microsoft made a $100.0 million equity investment in VerticalNet
through the purchase of shares of our Series A Preferred Stock, which are
initially convertible into 1,151,080 shares of our common stock. On April 1,
2010, at the election of the holder of the Series A Preferred Stock, we must
redeem all outstanding shares of Series A Preferred Stock at a specified price.
In addition, at our option, each share of Series A Preferred Stock will be
subject to redemption at a calculated price using cash or our common stock if
certain conditions are met. Because we can elect to redeem the preferred stock
for common equity, the preferred stock has been classified as an equity
instrument in the consolidated financial statements. In addition, Microsoft
received warrants entitling it to purchase 1,500,000 shares of our common stock
at an exercise price of $69.50 per share, subject to adjustment under certain
circumstances.

In connection with the formation of our Japanese joint venture, VerticalNet
Japan, in July 2000, we made an initial contribution of approximately $1.5
million. Additionally, we have a maximum aggregate obligation to contribute 1.2
billion Yen (approximately $11.1 million as of November 1, 2000) to the joint
venture over the next two years.

In July 2000, we entered into forward sale contracts relating to our
investment in Ariba (see Note 4). 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. The number of Ariba shares to be delivered at
maturity may vary depending on the then market price of Ariba's common stock
subject to our option to deliver the cash value of such shares.

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 this contract are mitigated by
expected offsetting fluctuations in the value of the pledged securities.

27
<PAGE> 28

our common stock, subject to the receipt of requisite regulatory approvals and
the fulfillment of customary closing conditions. Under the agreement, Sumitomo
may not transfer the purchased shares for one year from the closing date of the
transaction. Sumitomo was also granted limited demand and piggyback registration
rights exercisable after the first anniversary of the closing.

As we continue to grow, we expect to utilize cash resources to fund
operating losses, acquisitions, strategic investments, technologies and the
infrastructure necessary to support our growth. We expect that NECX and Tradeum,
as well as other acquisitions, will have a negative impact on our liquidity and
cash flow in the near term as we integrate their businesses with ours and invest
in the technology necessary to allow the businesses to operate in an on-line
environment. We believe that our current level of liquid assets will be
sufficient to finance our capital requirements and anticipated operating losses
for at least the next 12 months. However, to the extent our current level of
liquid assets proves to be insufficient, we may need to obtain additional debt
or equity financing. Additionally, we may, if the capital markets present
attractive opportunities, raise cash through the sale of debt or equity. We can
provide no assurance that we will be successful in obtaining such financing
either on acceptable terms or at all.

28
<PAGE> 29

FACTORS AFFECTING OUR BUSINESS CONDITION

OUR LIMITED OPERATING HISTORY AND EVOLVING REVENUE MODEL MAKE IT DIFFICULT TO
PREDICT OUR FUTURE OPERATING RESULTS AND EVALUATE OUR FUTURE PROSPECTS.

We launched our first vertical trade community in October 1995 and have a
relatively limited operating history. Our limited operating history, together
with our evolving revenue model and the rapidly changing e-commerce market,
makes predicting our future operating results and evaluating our future
prospects very difficult. Currently, a significant percentage of our overall
revenues are generated from our exchange operations, while our Internet-based
revenues are generated primarily from the sale of advertising on our vertical
trade communities. In the foreseeable future, we expect to continue generating a
significant percentage of our overall revenues from our exchange operations,
while diversifying our revenue stream by generating additional revenue from
e-commerce and software licensing and related services. We may not be able to
sustain our current revenues or generate additional revenues from multiple
sources. If we do not sustain our current revenues or generate additional
revenues from multiple sources, our business, financial condition and operating
results will suffer.

WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.

As of September 30, 2000, our accumulated deficit was $190.9 million. For
the nine months ended September 30, 2000, we sustained a $121.1 million net
loss, after accounting for a preferred stock dividend accrual. We expect to
incur operating losses for the foreseeable future. We may never generate
operating profit or, if we do become profitable from operations, we may be
unable to sustain that profitability.

WE MAY NOT DEVELOP SIGNIFICANT REVENUES FROM E-COMMERCE, SOFTWARE LICENSING AND
RELATED SERVICES, WHICH COULD ADVERSELY AFFECT OUR FUTURE GROWTH.

For the nine months ended September 30, 2000, approximately 10.0% of our
revenues, including approximately $3.0 million of on-line net exchange revenues,
were generated from e-commerce. Additionally, we are beginning to implement our
strategy regarding software licensing and related services. If we do not
generate increased revenues from e-commerce or significant revenues from
software licensing and related services, our business, financial condition and
operating results could be impaired. To generate significant e-commerce,
licensing and service revenues, we must continue to build and acquire
significant e-commerce capabilities and enhance our existing vertical trade
community technology. However, our internal efforts, as well as acquisitions we
have made or will make, to enhance our e-commerce capabilities and our
technologies may not provide the results we expect.

IF WE CANNOT REDUCE OR CONTAIN OUR EXPENSES, OUR OPERATING RESULTS WILL SUFFER.

Our limited operating history and our evolving revenue model make it
difficult to predict our future operating expenses. If we cannot reduce or
contain our expenses, our operating results will suffer. Some of our expenses
are fixed, including those related to non-cancelable agreements, equipment
leases and real estate leases. In addition, we plan to increase our operating
expenses significantly to:

- launch additional vertical trade communities;

- increase our sales and marketing operations;

- enter into additional strategic relationships and assist us in fulfilling
our obligations in our existing strategic relationships;

- enhance our technologies;

- develop and deploy our e-commerce and software licensing initiatives;

- design and integrate a scalable on-line exchange for NECX;

29
<PAGE> 30

- enter into additional sponsorship agreements; and

- broaden our customer support capabilities.

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

Our quarterly operating results could vary significantly. We believe that
period-to-period comparisons of our operating results are not meaningful and
should not be relied on as indicators of future performance. If our operating
results in a future quarter or quarters do not meet the expectations of
securities analysts or investors, the price of our common stock will fall.

We expect that our quarterly operating results will fluctuate significantly
due to various factors, many of which are beyond our control, including:

- market conditions in the electronic components and hardware industry;

- the amount and seasonal nature of our electronic component and hardware
sales;

- intense and increased competition in our target markets;

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

- the level of demand for our products and services;

- risks associated with past and future acquisitions;

- management of our growth;

- the seasonality of our revenues and user traffic; and

- our dependence on content providers.

Any quarterly fluctuations in our exchange revenues may disproportionately
affect our operating results because our exchange revenues constitute a
substantial percentage of our overall revenues.

In the course of our business, we may acquire securities of privately-held
companies with whom we form strategic relationships. Our quarterly operating
results may also fluctuate significantly due to accounting rules governing the
treatment of these securities. Specifically, before the market value of these
securities becomes readily determinable as a result of being tradable in a
public market, they are carried on our consolidated balance sheets at cost.
However, if these non-public securities become salable in the public market as a
result of a transaction in which such securities are exchanged for public
securities, accounting rules require us to record a non-operating gain or loss
equal to the difference between our cost and the market value of the public
securities received, regardless of whether we sell or retain the securities. Our
holdings in public securities are then marked to market at the end of each
quarter. If the market value of an equity security we own becomes readily
determinable and we sell that security, we will realize a gain or loss on the
transaction. These non-recurring gains or losses may occur from time to time and
could cause significant fluctuations in our quarterly results. Similarly, our
quarterly results may also fluctuate if we determine that a decline in the fair
value of one of our equity positions is other than temporary, which would
require us to write-down or write-off the carrying value of those securities.
During the three months ended September 30, 2000, we recorded a $1.0 million
impairment charge for an other than temporary decline in the fair value of one
of our cost method investments.

THE ELECTRONICS INDUSTRY HAS HISTORICALLY EXPERIENCED SHORTAGES AND IMBALANCES,
CYCLES, DOWNTURNS AND OTHER FLUCTUATIONS IN DEMAND THAT COULD ADVERSELY AFFECT
OUR BUSINESS.

The growth of our electronics exchange business is materially dependent on
shortages and imbalances in the markets for electronic components and hardware.
If these shortages and imbalances are reduced or eliminated, the growth of our
electronics exchange business will decline, which would have a material adverse
effect on our business, financial condition and results of operations given the
significance of our exchange

30
<PAGE> 31

revenues to our overall revenues. For example, the recent significant growth in
our electronics exchange business can be attributed, in part, to shortages and
imbalances in the markets for capacitors (ceramic and tantulum), flash memory
and, more recently, storage devices and hard drives. However, the shortages in
the capacitor and flash memory markets are over, and other shortages are not
expected to continue indefinitely. Management cannot predict, with any
reasonable level of certainty, the duration of the existing shortages or the
magnitude of existing imbalances. To the extent these shortages and imbalances
shrink or disappear and are not replaced by sustained shortages and imbalances
in the markets for other electronic components or hardware, the growth of our
electronics exchange revenues will decrease from recent levels and our overall
financial performance will suffer.

Historically, general economic downturns and business cycles also have had
an adverse economic effect upon participants in the electronics industry,
including hardware and component manufacturers, distributors and market makers
such as NECX. If economic conditions or the cyclical nature of the electronic
industry causes a reduction in the amount of electronic components and hardware
bought and sold, our business, financial condition and operating results will be
adversely affected.

Additionally, in our exchange business we are exposed to inventory risk
when we purchase electronic components before we are able to locate a buyer for
these components. To the extent we are unable to sell that inventory, we may be
required to write-down the value of that inventory if we cannot sell it
promptly. Any such write-down would have a negative impact on our results of
operations and ultimately our business.

IF WE ARE UNABLE TO MAINTAIN GROSS PROFIT MARGINS IN OUR EXCHANGE BUSINESS, OUR
OPERATING RESULTS WILL SUFFER.

If the gross profit margins of our exchange business decrease, our business
could suffer. Gross profit margins in our exchange business are affected by
numerous factors, including the following:

- component supply and demand;

- inventory levels held by electronic manufacturers and distributors;

- component lead times;

- product sales mix; and

- our ability to purchase components at favorable prices.

Many of these factors are beyond our control. Additionally, our inability
to integrate our traditional off-line exchange business into an on-line business
might hinder our ability to increase gross margins in that segment.

IF OUR STRATEGIC RELATIONSHIP WITH MICROSOFT DOES NOT PROVIDE THE BENEFITS WE
EXPECT, OUR BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED.

If we are ultimately unable, for any reason, to realize the benefits we
expect from our strategic relationship with Microsoft, our business, financial
condition and results of operations will be materially and adversely affected.
We believe this strategic relationship is critical to our success because it
offers the possibility of additional users of our vertical trade communities,
further acceptance and validation of our business strategy and model and
additional opportunities to generate e-enablement, e-commerce, advertising and
services revenues. However, we may never generate any significant additional
revenues or realize any of the other benefits expected from this relationship.
For example, if a significant percentage of businesses fail to renew the
storefronts that were purchased on their behalf by Microsoft, our financial
condition and operating results will be adversely affected.

To reap any such benefits, we must first fulfill our obligations in this
relationship, which include, among other things, building and assisting
Microsoft with the distribution of storefronts and e-commerce centers. Meeting
these obligations will require substantial resources on our part, including
retraining existing employees and hiring additional personnel. It may also be
necessary for our management and other key

31
<PAGE> 32

personnel to divert their attention from other aspects of our business in order
to focus on our implementation of the Microsoft relationship and to ensure that
our other strategic relationships take into account the Microsoft relationship.
Additionally, if we fail to meet the performance goals established under this
relationship, we will need to pay additional amounts to Microsoft. Accordingly,
the material adverse effect on our business that would result from a failure to
realize the anticipated benefits from this relationship would be magnified by
our dedication of substantial resources to this relationship and the payment of
additional amounts to Microsoft.

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

The market for business-to-business e-commerce products and services is
intensely competitive. Increased competition may result in reduced margins and
loss of market share, either of which would seriously harm our business. We
expect the intensity of competition in our target markets to increase as the
amount of e-commerce transacted over the Internet grows, current competitors
expand their product and service offerings and new competitors enter the market.

We are facing increased competition in each of our strategic business
units.

- VerticalNet Markets. Several companies offer competitive vertical trade
communities. We expect that additional companies will offer competing
vertical trade communities on a standalone or portfolio basis because
competitors can launch new Web sites at a relatively low cost. We also
compete for a share of a customer's advertising budget with on-line
services and traditional off-line media, such as print publications and
trade associations.

- VerticalNet Exchanges. The market for electronic components and hardware
is also intensely competitive. Our competitors in the electronic
components and hardware industry, which vary in size and in the scope of
the services and features offered, include: component manufacturers;
franchised and independent distributors; other market makers; electronic
components brokers; on-line catalog aggregators; on-line excess surplus
auction companies; enterprise software companies; e-procurement
providers; and vertical content providers.

- VerticalNet Solutions. As we implement our strategy regarding licensing
e-commerce and vertical trade community software and providing related
professional and business operations services, we are facing 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 MAY NOT REALIZE ANY RETURN ON, AND MAY EVEN SUFFER A COMPLETE LOSS OF, OUR
EQUITY INTERESTS IN OUR STRATEGIC PARTNERS.

We are increasingly asked to acquire equity interests in the companies with
whom we form strategic relationships. We may never realize any return on these
interests, which generally range from $500,000 to $3.0 million in any given
instance. In fact, we may suffer a complete loss of these equity interests,
which would materially and adversely affect our business and financial
condition. Our ability to realize a return on any of these equity positions is
far from certain, given that these companies have limited financial and other
resources, yet are subject to many of the same risks and uncertainties that we
face in our business, including limited operating histories, evolving revenue
models and uncertain market acceptance of their products and services. Moreover,
we are often unable to require terms and conditions related to these equity
interests (e.g., board membership or observer rights) that are particularly
favorable to us vis-a-vis other investors. Allocating

32
<PAGE> 33

our financial resources to these types of strategic relationships, rather than
reinvesting those funds directly in our own business, may ultimately cause our
business to suffer.

ACQUISITIONS MAY NEGATIVELY IMPACT OUR BUSINESS.

We have grown, and plan to continue to grow, our business through
acquisitions. If we are unable to complete future acquisitions, our business,
financial condition and operating results could be negatively impacted. We may
not be able to identify additional suitable businesses that are available for
sale at reasonable prices or on reasonable terms. Even if we are able to
identify appropriate acquisition candidates, we may not be able to negotiate the
terms of any acquisition successfully, finance the acquisition or integrate the
acquired business, including its products, services, technologies or personnel,
into our existing business operations. For example, we may be unsuccessful in
utilizing Tradeum's technology to build the on-line exchange platform for NECX.

Our acquisition strategy is also subject to numerous other risks including,
without limitation, the following:

- acquisitions may cause a disruption in our ongoing business, distract our
management and other resources and make it difficult to maintain our
standards, controls and procedures;

- we may acquire companies in markets in which we have little experience;

- we may not be able to retain key employees from acquired companies, and
may face competition from employees that leave before or after an
acquisition is complete;

- we may be required to incur debt or may issue equity securities, which
may be dilutive to existing shareholders, to pay for acquisitions;

- we may not realize any return on our investment in the acquired company
and may even lose our entire investment and incur significant additional
losses;

- our share price could decline following the market's reaction to our
acquisitions;

- our amortization expense will increase as a result of acquisitions; and

- our interest deductions may be disallowed for federal income tax
purposes.

IF WE COMPLETE OUR PROPOSED ACQUISITION OF SIERRACITIES, WE MIGHT HAVE
DIFFICULTIES INTEGRATING SIERRACITIES' BUSINESS INTO OUR EXISTING OPERATIONS, AS
WELL AS FACE NEW RISKS THAT WE HAVE NOT PREVIOUSLY FACED.

On November 6, 2000, we entered into an agreement to acquire
SierraCities.com Inc. The completion of this combination is subject to the
tender of two-thirds of the outstanding SierraCities shares and other customary
conditions. If we complete the proposed combination, we must integrate the
businesses of two companies that have previously operated independently. We
might not be able to integrate SierraCities' business, including its products,
services, technologies and personnel, into our existing operations without
encountering difficulties. The diversion of management's attention to the
integration effort and any difficulties encountered in combining operations
could adversely affect the companies' respective businesses following the
completion of the merger.

Following the closing of the proposed transaction, we intend to restructure
SierraCities' current funding strategy. Under its current strategy, SierraCities
funds loans and leases with equity, then moves them into a warehouse facility
provided by one of its credit sources and, from time to time, effects a
securitization of these assets. We intend to establish flow arrangements with
selected financial institution partners under which loans and leases will be
originated by SierraCities and immediately sold for a fee to flow partners. If
we cannot establish flow arrangements with a sufficient number of financial
institution partners on a timely basis or at all, we will not be successful in
restructuring this strategy and, thus, we will not be able to minimize the size
of the balance sheet associated with the SierraCities business and to reduce our
exposure to credit risk. Additionally,

33
<PAGE> 34

we could face additional risks inherent in SierraCities' business that were
previously irrelevant to our business, such as:

- We might be dependent on securitized warehouse facilities and the public
securitization market to finance and refinance leases and loans. If, for
any reason, we could not access these financing sources for that purpose,
or if the terms and condition of any future facility or securitization
differ from SierraCities' previous facilities or securitizations, our
business, financial condition and results of operations following the
closing could suffer.

- To the extent we might need additional capital in the future to fund our
operations, the amount of additional funds we might otherwise require
could be significantly increased due to the capital requirements of
SierraCities' business.

- Increases in interest rates could reduce our operating margins, which
would adversely affect our results of operations, as well as cause us to
raise the rates we would charge our customers, which could reduce the
demand for the products and services we provide.

- Borrower and lessee defaults might impair our liquidity under
SierraCities existing financing and securitization arrangements, as well
as our ability to obtain financing and effect public securitizations as
might be necessary in the future.

Ultimately, SierraCities' business is a business in which we have little
experience. Our inexperience in managing a business like SierraCities' might
cause us never to realize any of the intended benefits of the transaction.

WE MAY NOT BE ABLE TO INTEGRATE OUR OFF-LINE EXCHANGES INTO AN ON-LINE BUSINESS,
WHICH WOULD LIMIT OUR ABILITY TO GENERATE HIGHER REVENUES.

Our acquisition of NECX and other exchanges have resulted in significant
revenues for us. However, our ability to sustain our current revenues or
possibly generate substantially higher revenues is not only dependent on market
conditions in the electronic components and hardware industry, but also on our
ability to integrate our off-line exchange business with an on-line business.
For the nine months ended September 30, 2000, NECX generated net revenues of
approximately $83.0 million, $3.0 million of which were attributable to its
on-line market-making business. By comparison, VerticalNet generated net
revenues of approximately $71.8 million for the nine months ended September 30,
2000, most of which were derived from e-enablement, e-commerce, advertising and
services.

We have retained third parties to assist us in designing and building a new
on-line exchange for NECX. We expect this project to be expensive and
time-consuming. This project might not be completed at the cost and on the
timeline that we currently contemplate. If we cannot integrate NECX's
traditional off-line business effectively into our on-line business, whether due
to time, monetary or other limitations, the potential to sustain current revenue
and generate additional revenues through our exchange business may never be
realized, which could adversely affect our business, financial condition and
operating results.

OUR PROPOSED ON-LINE EXCHANGE MAY NOT BE SUCCESSFUL IF IT IS NOT ADOPTED BY A
SIGNIFICANT NUMBER OF BUYERS AND SUPPLIERS.

Even if we are successful in developing an on-line exchange, it will not be
widely accepted if we do not successfully transition a portion of those buyers
and suppliers who use NECX's off-line business to an on-line exchange and
attract a significant number of additional buyers and suppliers to the on-line
exchange. Non-acceptance of our on-line exchange would limit the growth of our
e-commerce revenues and could adversely affect our business, financial condition
and operating results. Whether we can retain and attract buyers and suppliers to
an on-line exchange will depend in large part on our ability to design, develop
and implement a secure, user-friendly application with features and
functionality that buyers and suppliers find attractive in an e-commerce
solution and that provides substantial value to its users over traditional
procurement methods. Buyers and suppliers may continue purchasing and selling
products through traditional procurement methods,

34
<PAGE> 35

rather than adopting an Internet-based solution. Buyers and suppliers also may
not use our on-line exchange if it is not perceived as a neutral marketplace
that treats all participants equally.

IF OUR ADVERTISING REVENUES DECLINE, OUR BUSINESS WOULD SUFFER.

We currently rely on revenues generated from the sale of advertising on our
vertical trade communities for a significant portion of our revenues. If we do
not continue to increase advertising revenues, our business may suffer. Our
ability to increase our advertising revenues depends on many factors, including,
without limitation:

- acceptance of the Internet as a legitimate, effective and measurable
medium for advertising and e-commerce;

- the development of a large base of users on our vertical trade
communities who possess demographic characteristics attractive to
advertisers;

- changes in industry pricing practices for advertising; and

- the expansion of our sales and marketing force.

Other factors could also adversely affect our advertising revenues. For example,
widespread use of "filter" software programs that limit access to storefront
advertising from the Internet user's browser could reduce advertising on the
Internet. Additionally, no standards have been widely accepted to measure the
effectiveness of Internet advertising. If such standards do not develop,
existing advertisers may not continue their current levels of Internet
advertising, and advertisers who are not currently advertising on the Internet
may be reluctant to do so. These factors, as well as any other events or
circumstances that would cause a decline in the amount of advertising on the
Internet, would impair our business, financial condition and operating results.

For some of our advertising customers, we provide extended payment terms
over the length of the contract, rather than collecting the entire payment up
front. To the extent that these amounts are not collected, our advertising
revenues, bad debt expense and cash flows may be negatively impacted. We also
have barter arrangements where we provide banner advertisements, storefronts and
newsletter sponsorships to some of our customers in exchange for advertising on
their Web sites or in their publications. If our barter arrangements do not
continue, our advertising revenues may decline. For the nine months ended
September 30, 2000, approximately $6.6 million, or 4.3%, of our reported revenue
was generated by barter advertising arrangements.

OUR INTERNET CONTENT MAY NOT ATTRACT A SIGNIFICANT NUMBER OF USERS WITH
DEMOGRAPHIC CHARACTERISTICS VALUABLE TO ADVERTISERS.

Our future success depends in part upon our ability to deliver compelling
Internet content that will attract a significant number of users with
demographic characteristics valuable to our advertising customers. Our inability
to develop Internet content that attracts a loyal user base with demographic
characteristics attractive to advertisers could impair our business, financial
condition and operating results. We face the challenge of developing content
that is attractive to users in an environment characterized by rapidly changing
user preferences, as well as the ease with which users can freely navigate and
instantly switch among a large number of Web sites, many of which offer content
that may be more attractive than ours. If we cannot consistently anticipate or
respond quickly to changes in user preferences or distinguish our content from
that offered on other Web sites, we may never attract a significant number of
users with demographic characteristics that advertisers are seeking.

OUR FAILURE TO BUILD AND MAINTAIN RELATIONSHIPS WITH THIRD-PARTY CONTENT
PROVIDERS MAY IMPAIR OUR OPERATING RESULTS.

We rely on third parties, such as trade publications and news wires, to
provide some of the content for our vertical trade communities. It is critical
to our business that we maintain and build existing and new relationships with
content providers. However, we may not be able to do so, which could result in
decreased

35
<PAGE> 36

traffic on our vertical trade communities and decreased advertising revenues.
Many of our agreements with content providers are for initial terms of one to
two years. Content providers may choose not to renew the agreements or terminate
the agreements early if we do not fulfill our contractual obligations. Moreover,
like our existing agreements with some of our content providers, our new and
renewal agreements for third-party content may be non-exclusive, which means
that competitors may offer the same content we offer or similar content.
Additionally, the terms of any new or renewal agreements we enter into may be
less favorable to us than our existing agreements. In particular, as competition
for content increases, the licensing fees we pay to our content providers may
correspondingly increase, which would negatively impact our operating results.

IF WE DO NOT DEVELOP THE "VERTICALNET" BRAND AND THE BRANDS ASSOCIATED WITH OUR
DIVISIONS AND BUSINESS UNITS, OUR ADVERTISING REVENUES COULD DECREASE.

To be successful, we must establish and strengthen the brand awareness of
the "VerticalNet" brand, as well as the brands associated with our divisions and
business units. If our brand awareness is weakened, it could decrease the
attractiveness of our audiences to advertisers and reduce our relevant market
share, which could result in decreased revenues. We believe that brand
recognition will become increasingly important in the future with the growing
number of Internet sites and e-commerce solution providers. If customers do not
begin to associate secondary meaning with our brands, then our ability to gain
market share will be diminished, which could impair our business, financial
condition and operating results.

IF WE ARE UNABLE TO PROVIDE OUR CUSTOMERS AND USERS WITH ACCURATE PRODUCT
INFORMATION, OUR E-COMMERCE STRATEGY WILL NOT SUCCEED.

To enable suppliers to conduct e-commerce through our vertical trade
communities, we currently are responsible for loading suppliers' product
information into our database and categorizing the information for search
purposes. This process entails a number of risks, including dependence on our
suppliers to provide us in a timely manner with accurate, complete and current
information about their products and to update this information promptly when it
changes. The actual loading of these products in our database may be delayed,
depending upon a number of factors, including the formatting of the data
provided to us and our ability to further automate and expand our operations to
load this data accurately in our product database.

We are generally obligated under our supplier agreements to load and update
product data into our database within a specified period of time following its
delivery. While we intend to further automate the loading and updating of
supplier data on our system, we may not be able to do so in a timely manner, in
part because achieving the highest level of this automation is dependent upon
our suppliers' automating their delivery of product data to us. If our suppliers
do not provide us in a timely manner with accurate, complete and current
information about the products we offer, our database may not be useful to our
customers and users and may even expose us to liability. Although we screen our
suppliers' information before we make it available to our customers and users,
we cannot guarantee that the product information available in our database will
always be accurate, complete and current, or comply with governmental
regulations. Any resulting exposure to liability or decreased adoption and use
of our vertical trade communities could reduce our revenues and therefore have a
negative effect on our business, results of operations and financial condition.

IF OUR SUPPLIERS DO NOT PROVIDE PROFESSIONAL, SAFE AND TIMELY DELIVERY OF
PRODUCTS TO OUR CUSTOMERS, OUR BUSINESS WILL BE HARMED.

We rely on our suppliers to deliver products to our customers in a
professional, safe and timely manner. If our suppliers do not deliver products
to our customers in this manner, then our service will not meet customer
expectations and our reputation and brand will be damaged. In addition,
deliveries that are nonconforming, late or are not accompanied by information
required by applicable law or regulations could expose us to liability or result
in decreased adoption and use of our vertical trade communities, which could
have a negative effect on our business, results of operations and financial
condition. In some instances, we bear the responsibility for product refunds and
returns and the risk of non-collectibility of accounts receivable from our
customers.

36
<PAGE> 37

MANAGING OUR RAPID GROWTH EFFECTIVELY IS DIFFICULT.

We have rapidly and significantly expanded our operations and expect to
continue to do so by adding new products and services, hiring new employees and
acquiring new businesses. This growth has placed, and is expected to continue to
place, a significant strain on our resources and systems. To manage our growth,
we must implement systems and train and manage our employees. If we fail to
implement systems, train and manage our employees or integrate our recent and
future acquisitions successfully, our business, financial condition and
operating results could be negatively impacted.

OUR BUSINESS IS SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.

A substantial portion of our current business is based upon international
sales, which we believe will increase in the future. In addition, we purchase a
substantial amount of electronic components and hardware from entities based in
foreign countries. We are subject to a number of risks and uncertainties
associated with these international business activities. These risks and
uncertainties generally include:

- difficulties in the enforcement of contractual obligations and
intellectual property rights, including licensing rights, against foreign
entities or in foreign jurisdictions;

- currency exchange rate fluctuations and higher duty rates;

- unexpected changes in regulatory requirements;

- tariffs, import and export controls and regulations and other trade
barriers;

- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;

- increased costs and difficulties in managing and staffing international
operations;

- compliance with applicable United States and foreign laws, especially
import/export requirements;

- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;

- the costs and burdens of complying with a wide variety of foreign laws
and differing trade customs and practices;

- political instability; and

- potential transportation delays.

These factors may have a negative effect on current and future international
operations and, consequently, on our business, results of operations and
financial condition.

OUR INTERNATIONAL EXPANSION MAY MAKE IT MORE DIFFICULT TO MANAGE OUR BUSINESS.

In June 2000, we completed the formation of VerticalNet Europe, our joint
venture with British Telecommunications, plc and Internet Capital Group, while
in July 2000, we completed the formation of VerticalNet Japan, our joint venture
with Softbank Commerce Corp. We expect to further expand in international
markets. However, this expansion strategy may fail if we cannot create or
sustain international demand for our evolving business model and the products
and services we offer. Moreover, even if we are able to identify appropriate
international joint venture partners, we may not be able to negotiate the terms
of any venture successfully, finance the venture or integrate our partners'
business, products or technology into our existing business operations, or we
may become dependent on our joint venture partners.

To pursue our international expansion, we have established international
operations and hired senior management to oversee these operations. We also plan
to hire additional personnel and establish relationships with additional
suppliers and strategic partners. This expansion will require significant
management attention and financial resources and could have a negative effect on
our business, financial condition and results of operations.

37
<PAGE> 38

RISK OF FAILURE OF OUR COMPUTER AND COMMUNICATIONS HARDWARE SYSTEMS INCREASES
WITHOUT BACK-UP FACILITIES.

The performance of our computer and communications hardware systems is
critical to our business and reputation, as well as our ability to process
transactions, provide high quality customer service and attract and retain
customers, suppliers, users and strategic partners. Any system interruptions
that cause our vertical trade communities or our on-line exchange to be
unavailable to users may reduce their attractiveness to advertisers, buyers and
suppliers and could impair our business, financial condition and operating
results. We do not currently have back-up or redundant facilities for our
computer or communications hardware systems.

CAPACITY LIMITS ON OUR TECHNOLOGY, TRANSACTION PROCESSING SYSTEM AND NETWORK
HARDWARE AND SOFTWARE MAY BE DIFFICULT TO PROJECT AND WE MAY NOT BE ABLE TO
EXPAND AND UPGRADE OUR SYSTEMS TO MEET INCREASED USE.

As traffic on our vertical trade communities and our on-line exchange
increases, we must expand and upgrade our technology, transaction processing
systems and network hardware and software. We may not be able to project
accurately the rate of increase of traffic on our vertical trade communities or
on-line exchange. In addition, we may not be able to expand and upgrade our
systems and network hardware and software capabilities to accommodate increased
use of our vertical trade communities and on-line exchange. If we do not
appropriately upgrade our technology, systems and network hardware and software,
our business, financial condition and operating results will suffer.

OUR MARKET IS EVOLVING AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, WHICH WE
MAY NOT BE ABLE TO KEEP PACE WITH IN A COST-EFFECTIVE WAY.

The market for business-to-business e-commerce products and services is
evolving and characterized by rapid technological change and frequent new
product and service announcements. Significant technological changes could
render our existing e-commerce or vertical trade community technology obsolete.
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 adapt to our rapidly changing market by
continually improving and enhancing the responsiveness, services and features of
our vertical trade communities, by developing new services and technology to
meet customer needs and by continuing to integrate our off-line exchange
business with an on-line exchange. Our success will depend in part on our
ability to acquire or license leading technologies useful in our business, which
we may not to be able to do.

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 November
1, 2000, Internet Capital Group beneficially owned 25,318,644 shares, or
approximately 28.9%, of our common stock, which includes 250,000 shares of our
common stock underlying $5.0 million of our 5 1/4% convertible subordinated
debt, and 478,624 shares of our common stock underlying warrants issued to
Internet Capital Group prior to the IPO. Two representatives of Internet Capital
Group are members of our board of directors. We may compete with Internet
Capital Group for Internet-related opportunities as it seeks to expand its
number of business-to-business assets, 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 directors, may
deter companies from partnering with us and may limit our business
opportunities.

Additionally, in order to avoid registration under the Investment Company
Act of 1940, Internet Capital Group may need to own more than 25% of our voting
securities. If its ownership interest falls below 25%,

38
<PAGE> 39

Internet Capital Group may need to purchase additional voting securities to
return to an ownership interest of at least 25% in order 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.

Additionally, significant changes in Internet Capital Group's ownership of
our common stock could adversely affect our common stock's market price. For
example, rather than purchase additional voting securities as described in the
preceding paragraph, Internet Capital Group may choose to liquidate its position
entirely to avoid having to register as an investment company. 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,
then the market price of our common stock could fall.

OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL WHO WE MAY NOT BE ABLE TO RETAIN, AND
WE MAY NOT BE ABLE TO HIRE ENOUGH ADDITIONAL PERSONNEL TO MEET OUR NEEDS.

We believe that our success depends on continued employment of our senior
management team. If one or more members of our senior management team were
unable or unwilling to continue in their present positions, our business,
financial condition and operating results could be materially adversely
affected. As of November 1, 2000, only one member of our senior management team
had an employment agreement. We carry key person life insurance on certain, but
not on all, of our senior management personnel.

Our success also depends on having a highly trained technical staff, sales
force, telesales group and customer service organization. We will need to
continue to hire additional personnel as our business grows. Competition for
personnel, particularly for employees with technical expertise, is intense. A
shortage in the number of trained technical personnel, salespeople and customer
service professionals could limit our ability to design, develop and implement
our e-commerce solutions and other technology, increase sales in our existing
vertical trade communities and make new sales as we launch new vertical trade
communities and form other strategic relationships. Ultimately, our business,
financial condition and operating results will be impaired if we cannot hire and
retain suitable personnel.

OUR SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH IS
UNCERTAIN.

Business-to-business e-commerce is a new and emerging business practice
that remains largely untested in the marketplace and depends on the increased
acceptance and use of the Internet as a medium of commerce. If e-commerce does
not grow or grows more slowly than expected, our business will suffer. Our
long-term success depends on widespread market acceptance of e-commerce.

A number of factors could prevent such acceptance, including the following:

- buyers may be unwilling to shift their purchasing from traditional
vendors to on-line vendors;

- the necessary network infrastructure for substantial growth in usage of
the Internet may not be adequately developed;

- customers and suppliers may be unwilling to use on-line vendors due to
security and confidentiality concerns;

- increased government regulation or taxation may adversely affect the
viability of e-commerce;

- insufficient availability of, or changes in, telecommunication services
could result in slower response times or inconsistent service quality;

- e-commerce transactions generally lack the human contact that traditional
suppliers provide; and

- lack of availability of cost-effective, high-speed Internet service.

39
<PAGE> 40

SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
E-COMMERCE.

The secure transmission of confidential information over the Internet is
essential to maintaining customer and supplier confidence. Concerns regarding
security of transactions and transmitting confidential information over the
Internet may negatively impact our business. We believe that concerns regarding
the security of confidential information transmitted over the Internet, such as
credit card numbers, prevent many potential customers from engaging in on-line
transactions. If we do not add sufficient security features to future product
releases, our products may not gain market acceptance or we may incur additional
legal exposure. We have included basic security features in some of our products
to protect the privacy and integrity of customer data, such as password
requirements for access to portions of our vertical trade communities. We
currently use authentication technology, which requires passwords and other
information to prevent unauthorized persons from accessing a customer's
information. We also use encryption technology, which transforms information
into a "code" designed to be unreadable by third parties, to protect
confidential information such as credit card numbers in commerce transactions.

Despite the measures we have taken, our infrastructure is potentially
vulnerable to physical or electronic break-ins, viruses or similar problems. If
a person circumvents our security measures, he or she could misappropriate
proprietary information or cause interruptions in our operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more prevalent, our customers will
become more concerned about security. Our failure to address these concerns
adequately could impair our business, financial condition and operating results.

LIMITED INTERNET INFRASTRUCTURE MAY HARM OUR BUSINESS.

The significant growth of Internet traffic over a relatively short period
of time has caused frequent periods of decreased Internet performance, delays
and, in some cases, system outages. These problems are caused by limitations
inherent in the technology infrastructure supporting the Internet and the
internal networks of Internet users. If our existing or potential customers
experience frequent outages or delays on the Internet, our business may grow
more slowly than we expect or even decline. Our ability to grow our business is
limited by and depends upon the reliability of both the Internet and the
internal networks of our existing and potential customers. If improvements in
the infrastructure supporting both the Internet and the internal networks of our
customers and suppliers are not made timely, we may have difficulty obtaining
new customers or maintaining our existing customers, either of which could
reduce our potential revenues and have a negative impact on our business,
results of operations and financial condition.

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. As of November 1, 2000, we own and use 30 trademarks registered with
the United States Patent and Trademark Office ("PTO"). Additionally, we have 46
applications for registration of various trademarks pending with the PTO.
Outside of the United States, as of November 1, 2000, we own and use 14
trademarks registered with various foreign patent and trademark offices and have
39 applications pending with foreign patent and trademark offices. Likewise, as
of November 1, 2000, we have 9 patent applications pending with the PTO and we
own 1820 domain names. We may be unable to register, maintain and protect our
proprietary rights adequately or to prevent others from claiming violations of
their proprietary rights. Generally, our domain names for our vertical trade
communities cannot be protected as trademarks because they are considered
"generic" under applicable law. In addition, effective copyright, trademark,
patent and trade secret protection may be unavailable or limited in certain
countries, and the global nature of the Internet makes it impossible to control
the ultimate destination of our work. We also license content from third
parties, which makes it possible that we could become subject to infringement
actions based upon the content licensed from those third parties. We generally
obtain representations as to the origin and ownership of such licensed content
and indemnification from those third parties; however, this may not adequately
protect us. Any of these claims, regardless of their merit, could subject us to
costly litigation and the diversion of our technical and management personnel.
40
<PAGE> 41

WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER
THE INTERNET.

We may be subject to legal claims relating to the content on our vertical
trade communities, or the downloading and distribution of such content. Claims
could also involve matters such as defamation, invasion of privacy and copyright
infringement. Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content they offer. In addition, some
of the content provided on our vertical trade communities is drawn from data
compiled by other parties, including governmental and commercial sources, and we
re-key the data. This data may have errors. If our content is improperly used or
if we supply incorrect information, it could result in unexpected liability. Our
insurance may not cover claims of this type, or may not provide sufficient
coverage. Our business, financial condition and operating results could suffer
materially if costs resulting from these claims are not covered by our insurance
or exceed our coverage.

WE MAY BE EXPOSED TO PRODUCT LIABILITY AND OTHER COMMERCIAL CLAIMS.

We face potential liability for claims based on the nature of the products
that we sell and distribute, including claims for breach of warranty, product
liability, misrepresentation, violation of governmental regulations and other
commercial claims. Most of the manufacturers whose products we distribute have
warranties on those products. We pass that warranty through to our customers
whenever possible. However, in some instances we bear the risk of loss of
revenue from the product sale if a purchaser does not pay for a defective
product. Although we maintain general liability insurance, our insurance may not
cover some claims or penalties, is subject to policy limits and exclusions and
may not adequately indemnify us or our employees from any civil, governmental or
criminal liability. Furthermore, this insurance may not be available at
commercially reasonable rates in the future. Any liability not covered by our
insurance or in excess of our insurance coverage could have a negative effect on
our business, financial condition and operating results.

WE ARE SUBJECT TO GOVERNMENT REGULATION THAT EXPOSES US TO POTENTIAL LIABILITY
AND NEGATIVE PUBLICITY.

We currently rely upon our suppliers to meet all packaging, distribution,
labeling, hazard and health information notices to purchasers, record keeping
and licensing requirements applicable to our business during the entire
transaction. However, our reliance on our suppliers may not be sufficient to
protect our legal interests. For example, if we are held to be a seller or a
distributor of regulated products because we took legal title, we may have
inadvertently violated some governmental regulations by not having the
appropriate license or permit. We are unable to verify that our suppliers have
in the past complied, or will in the future comply, with all governmental or
other legal requirements that may be applicable to our sales. We could be fined
or exposed to potentially severe civil or criminal liability, including monetary
fines and injunctions, and we could receive potential negative publicity, if the
applicable governmental regulatory requirements have not been, or are not being,
fully met by our suppliers or by us directly. Negative publicity, fines and
liabilities could also occur if an unqualified person, or even a qualified
customer, lacks the appropriate license or permits to sell, use or ship, or
improperly receives a dangerous or unlicensed product through us. We do not
maintain any reserve for potential liabilities resulting from government
regulation.

It is also possible that a number of laws and regulations may be adopted or
interpreted in the United States and abroad with particular applicability to the
Internet. These laws and regulations may, for example, cover issues such as user
privacy, freedom of expression, pricing, content and quality of products and
services, taxation, advertising, intellectual property rights, access charges
and information security. The enactment of such laws could have a negative
effect on our business, financial condition and operating results.

WE MAY NOT HAVE SUFFICIENT CASH FLOW FROM OPERATIONS TO SERVICE OUR DEBT.

As of September 30, 2000, we had approximately $23.0 million in long term
debt (including our outstanding 5 1/4% convertible subordinated debentures).
Currently, we are not generating sufficient cash flow from operations to satisfy
the annual debt service payments required as a result of our September 1999
offering of convertible subordinated debentures. If we are unable to satisfy our
debt service requirements, substantial liquidity problems could result, which
would negatively impact our future prospects.

41
<PAGE> 42

WE MAY REQUIRE ADDITIONAL CAPITAL FOR OUR OPERATIONS, WHICH COULD HAVE DILUTIVE
AND OTHER NEGATIVE EFFECTS ON OUR SHAREHOLDERS.

We currently anticipate that our cash on hand, existing borrowing
arrangements, current investments (including equity interests in other entities)
and other available funds will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next 12 months. We may
need, or find it advantageous, to raise additional funds in the future to fund
our rapid growth, pursue sales and licensing opportunities, develop new or
enhanced products and services, respond to competitive pressures or acquire
complementary businesses, technologies or services.

If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our shareholders will be reduced
and shareholders may experience additional dilution. These securities may also
have powers, preferences and rights that are senior to those of the rights of
our common stock. We cannot be certain that additional financing will be
available on terms favorable to us, if at all. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
expansion, promote our brand identity, take advantage of acquisition
opportunities, develop or enhance products or services or respond to competitive
pressures. Any inability to do so could have a negative effect on our business,
financial condition and results of operations.

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

If our shareholders or optionholders sell substantial amounts of our common
stock in the public market, including shares issued in connection with 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 November 1, 2000, the holders of up to approximately 24,590,020
shares of common stock, warrants to purchase 2,127,038 shares of common stock
and 101,450 shares of Series A Preferred Stock, which are initially convertible
into approximately 1,167,770 shares of common stock, have demand and/or
piggy-back registration rights. Under the terms of the Series A Preferred Stock,
we may elect to pay the dividends payable thereunder by issuing shares of Series
A Preferred Stock or shares of common stock, rather than paying cash dividends.
As of September 30, 2000, cumulative dividends of $3.0 million had been earned
by the holder of our Series A Preferred Stock, of which $1.5 million were
earned, but not yet paid. The shares of common stock underlying any dividended
shares of Series A Preferred Stock and any dividended shares of common stock are
also subject to demand and piggyback registration rights. The exercise of such
rights could adversely affect the market price of our common stock.

We 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 the shelf registration statement, 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.

On October 31, 2000, we entered into an agreement with Sumitomo Corporation
under which Sumitomo has agreed to purchase $30.0 million of our common stock,
subject to the receipt of regulatory approval and the fulfillment of customary
closing conditions. We granted Sumitomo limited demand and piggyback
registration rights exercisable after the first anniversary of the closing. The
sale of Sumitomo's shares on the public market could likewise adversely affect
the market price of our common stock.

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

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

42
<PAGE> 43

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 stock market in general, and the market for stocks of Internet-related
and technology companies in particular, have been highly volatile. The market
price of our common stock has been, and will likely continue to be, similarly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to such
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks and
have reflected relative valuations substantially above historical levels. During
the same period, many of these companies' stocks have also recorded lows well
below their historical highs. Our stock may not trade at the same levels as
other Internet-related or technology stocks, and these stocks in general may not
sustain their current market prices.

Factors that could cause such volatility may include, among other things:

- actual or anticipated variations in quarterly operating results;

- announcements of technological innovations;

- new sales models or new products or services;

- changes in financial estimates by securities analysts;

- conditions or trends in the Internet or business-to-business e-commerce
industries;

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

- failure to meet analysts' or investors' expectations;

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

- capital commitments;

- additions or departures of key personnel; and

- sales of common stock or instruments convertible into common stock.

Many of these factors are beyond our control. These factors may cause the
market price of our common stock to fall, regardless of our operating
performance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to risks associated with interest rate changes and changes
in the market value of our investments.

Interest Rate Risk. Our exposure to market risk related changes in
interest rates relates primarily to our investment portfolio and to our trade
receivables securitization. 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, 2000, our portfolio investments consisted of $87.6
million in cash and cash equivalents and $55.8 million in available for sale
debt instruments included in short-term and long-term investments. Due to the
conservative nature of our investment portfolio, 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, 2000 would
have decreased by less than $0.1 million. This estimate assumes that the
decrease occurred on the first day of the quarter and reduced the yield of each
investment instrument by 100 basis points. The impact on

43
<PAGE> 44

our future interest income and future changes in investment yields will depend
largely on the gross amount of our investment portfolio.

In September 2000, NECX entered into a trade receivables securitization
facility through a wholly-owned bankruptcy-remote special purpose subsidiary.
Sale proceeds of $75.0 million were received as of September 30, 2000 from the
sale of receivables and we recorded a net loss on sale of approximately $0.4
million. The net loss on sale was calculated using an agreed upon formula
primarily driven by the 30 day commercial paper rate. We estimate that if the 30
day commercial paper rate had decreased or increased by 100 basis points, our
loss on sale as of September 30, 2000 would have been positively or negatively
affected by approximately $0.1 million, respectively.

Investment Risk. We invest in equity instruments of privately held
companies for business and strategic purposes. These investments are included in
other assets 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. 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 on long-lived assets when events and
circumstances indicate that such assets might be impaired. As of September 30,
2000, we had recorded a $1.0 million impairment charge for an other than
temporary decline in fair value of one of our cost method investments. Since our
initial investment, certain of these investments in privately held companies
have become marketable equity securities upon the investees' completion of
initial public offerings or the acquisition of the investee by a public company.
Such investments, most of which are in the Internet industry, are subject to
significant fluctuations in fair market value due to the volatility of the stock
market. As of September 30, 2000, the fair market value of these investments
included in short-term and long-term investments was $62.4 million.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

(c) During the quarter ended September 30, 2000, we issued the following
unregistered securities pursuant to the following transactions:

- On July 13, 2000, we issued 1,097,457 shares of our common stock valued
at approximately $54.9 million in connection with the acquisition of AICE
in exchange for the assets acquired and liabilities assumed.

- On August 24, 2000, we paid a quarterly dividend of $1.5 million to the
holder of our Series A Preferred Stock in the form of 1,450 additional
shares of our Series A Preferred Stock.

- On August 9, 2000, we issued 117,302 shares of our common stock valued at
approximately $5.0 million upon the achievement of earnout targets by
AICE.

These transactions were exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The transactions were privately negotiated
and did not include any general solicitation or advertising. Each purchaser
represented that he, she, or it was acquiring the shares without a view to
distribution and was afforded an opportunity to review all publicly filed
documents and to ask questions and receive answers from our management.

(d) Not applicable.