FREEMARKETS INC, 10-Q, 2000-05-10

FREEMARKETS INC
10-Q, 2000-05-10
BUSINESS SERVICES, NEC

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UNITED STATES
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 MARCH 31, 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 000-27913

FREEMARKETS, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 04-3265483
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)

FREEMARKETS CENTER
210 SIXTH AVENUE
PITTSBURGH, PA 15222
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

(412) 434-0500
(Registrant's Telephone Number, Including Area Code)

ONE OLIVER PLAZA
(BUILDING NAME CHANGED TO FREEMARKETS CENTER)
210 SIXTH AVENUE
PITTSBURGH, PA 15222
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)

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 [ ]

The number of shares of the registrant's common stock outstanding as of the
close of business on April 30, 2000 was 37,237,195.

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FREEMARKETS, INC.

FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 2000 (unaudited) and December 31,
1999.......................................... 3
Condensed Consolidated Statements of
Operations for the three months ended March
31, 2000 and 1999 (unaudited)................. 4
Condensed Consolidated Statements of Cash
Flows for the three months ended March 31,
2000 and 1999 (unaudited)..................... 5
Notes to Condensed Consolidated Financial
Statements.................................... 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 9

Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 21

PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.................................. 22

Item 6. Exhibits and Reports on Form 8-K................... 22

Signature................................................... 23
</TABLE>
<PAGE> 3

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FREEMARKETS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $102,169,779 $177,204,143
Short-term investments.................................... 72,132,087 33,040,205
Accounts receivable, net.................................. 10,629,757 6,887,270
Other current assets...................................... 4,119,980 1,441,111
------------ ------------

Total current assets................................... 189,051,603 218,572,729

Property and equipment, net................................. 17,175,238 12,114,672
Other assets, net........................................... 767,282 966,680
Goodwill, net............................................... 351,383,964 --
------------ ------------

Total assets........................................... $558,378,087 $231,654,081
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,356,541 $ 4,763,795
Accrued incentive compensation............................ 2,311,645 899,410
Accrued acquisition costs................................. 6,080,000 --
Other current liabilities................................. 5,714,930 2,559,462
Current portion of long-term debt......................... 1,836,322 1,499,962
------------ ------------

Total current liabilities.............................. 21,299,438 9,722,629

Long-term debt.............................................. 3,508,463 3,277,716
------------ ------------

Total liabilities...................................... 24,807,901 13,000,345
------------ ------------

Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 370,639 351,391
Additional capital........................................ 577,941,013 244,909,299
Unearned stock-based compensation......................... (1,299,543) (1,525,194)
Stock purchase warrants................................... -- 30,000
Accumulated other comprehensive loss...................... (303,333) (110,409)
Accumulated deficit....................................... (43,138,590) (25,001,351)
------------ ------------

Total stockholders' equity............................. 533,570,186 218,653,736
------------ ------------

Total liabilities and stockholders' equity............. $558,378,087 $231,654,081
============ ============
</TABLE>

The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4

FREEMARKETS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues.................................................... $ 10,808,039 $ 3,498,705
Cost of revenues............................................ 6,334,269 1,565,324
------------ -----------
Gross profit........................................... 4,473,770 1,933,381
------------ -----------
Operating costs:
Research and development.................................. 2,884,026 555,238
Sales and marketing....................................... 7,419,743 593,096
General and administrative................................ 5,166,426 1,242,644
Stock-based expense....................................... 225,651 --
Goodwill amortization..................................... 2,145,310 --
Write-off of in-process research and development.......... 7,396,853 --
------------ -----------
Total operating costs....................................... 25,238,009 2,390,978
------------ -----------
Operating loss......................................... (20,764,239) (457,597)
Other income (expense), net................................. 2,627,000 (34,569)
------------ -----------
Net loss............................................... $(18,137,239) $ (492,166)
============ ===========

Basic and diluted earnings per share........................ $ (.51) $ (.04)
============ ===========
Shares used in computing basic and diluted earnings per
share..................................................... 35,498,829 11,810,399
============ ===========
</TABLE>

The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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FREEMARKETS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(18,137,239) $ (492,166)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 931,226 112,575
Provision for bad debts................................ 190,966 21,816
Loss on disposal of property and equipment............. 393,104 --
Stock-based expense.................................... 225,651 --
Goodwill amortization.................................. 2,145,310 --
Write-off of in-process research and development....... 7,396,853 --
Cash (used in) provided by changes in:
Accounts receivable.................................... (3,425,973) 493,912
Other assets........................................... (2,560,875) (82,171)
Accounts payable....................................... (1,975,470) 497,462
Other liabilities...................................... 3,009,081 (423,949)
------------ -----------
Net cash (used in) provided by operating
activities...................................... (11,807,366) 127,479
------------ -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ (16,660,333) --
Purchases of short-term investments....................... (39,199,149) --
Capital expenditures, net................................. (3,576,936) (1,387,992)
Software development costs................................ (611,321) --
Patent and trademark costs................................ (64,741) (27,586)
------------ -----------
Net cash used in investing activities............. (60,112,480) (1,415,578)
------------ -----------
Cash flows from financing activities:
Proceeds from debt........................................ -- 2,695,233
Repayment of debt......................................... (3,197,978) (1,955,695)
Proceeds from the exercise of options and warrants........ 83,460 1,300,809
------------ -----------
Net cash (used in) provided by financing
activities...................................... (3,114,518) 2,040,347
------------ -----------
Net change in cash and cash equivalents..................... (75,034,364) 752,248
Cash and cash equivalents at beginning of period............ 177,204,143 1,655,932
------------ -----------
Cash and cash equivalents at end of period.................. $102,169,779 $ 2,408,180
============ ===========

Supplemental non-cash disclosure:
Issuance of stock and assumption of options in connection
with acquisition....................................... $333,593,750 --
============ ===========
</TABLE>

The accompanying notes are an integral part of the condensed consolidated
financial statements.
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FREEMARKETS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements have been
prepared by FreeMarkets, Inc. and Subsidiaries (the "Company") and reflect all
adjustments (all of which are normal and recurring in nature) that, in the
opinion of management, are necessary for a fair presentation of the interim
periods presented. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire year ending December 31, 2000. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in accordance with the Securities and Exchange Commission's rules and
regulations. The unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the Company's audited
consolidated financial statements and notes for the year ended December 31,
1999, included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 16, 2000.

NOTE 2. EARNINGS PER SHARE

The computation of earnings per share is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net loss....................................... $(18,137,239) $ (492,166)
Weighted average common shares used in
computing basic and diluted earnings per
share........................................ 35,498,829 11,810,399
Basic and diluted earnings per share........... $ (.51) $ (.04)
</TABLE>

The following potentially dilutive common shares were excluded because
their effect was antidilutive:

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Stock options and warrants....................... 11,294,893 8,254,439
Convertible preferred stock...................... -- 11,383,800
</TABLE>

NOTE 3. ACQUISITIONS

In March 2000, the Company acquired iMark.com, Inc. ("iMark"), a
business-to-business online marketplace for surplus equipment and inventory. The
Company issued 1,573,725 shares of its common stock and assumed 176,275 options
with an aggregate total value of $333.6 million, in exchange for all of the
outstanding shares and options of iMark. The acquisition was accounted for as a
purchase business combination, and the purchase price of $339.6 million,
including estimated transaction costs of $6.0 million, was allocated as follows:

<TABLE>
<S> <C>
Goodwill and other intangible assets........................ $336,244,000
In-process research and development......................... 7,397,000
Liabilities assumed in excess of the fair value of assets
acquired.................................................. (4,047,000)
------------

Total purchase price........................................ $339,594,000
============
</TABLE>

Goodwill and other intangible assets are being amortized on a straight-line
basis over 36 months. In-process research and development was written off as a
non-recurring charge upon consummation of the acquisition because those research
and development efforts had not yet reached technological feasibility and had no
alternative future uses.

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FREEMARKETS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Also in March 2000, the Company purchased substantially all of the assets
of Surplus Record, Inc. and SR Auction, Inc. (collectively, "Surplus Record")
for $18.0 million in cash. Surplus Record consists of a directory and network of
dealers and buyers and an online surplus asset trade site for business surplus,
new and used industrial equipment, machinery and machine tools. The acquisition
was accounted for as a purchase business combination, and the excess of the
purchase price over the fair value of the net assets acquired of $17.9 million
was allocated to goodwill, which is being amortized on a straight-line basis
over 36 months.

The following unaudited pro forma financial information presents the
Company's results of operations as if the acquisitions of iMark and Surplus
Record occurred at the beginning of each period presented. The write-off of
in-process research and development has been excluded because it is
non-recurring. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company, iMark and Surplus Record constituted a single entity during such
periods.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues........................... $ 11,630,000 $ 4,278,000
Goodwill amortization.............. (29,461,000) (29,461,000)
Net loss........................... (44,696,000) (29,873,000)
Basic and diluted earnings per
share............................ (1.21) (2.23)
</TABLE>

NOTE 4. COMPREHENSIVE INCOME OR LOSS

Other comprehensive loss includes the net effect of foreign currency
translation adjustments and unrealized gains or losses on short-term
investments. Including net loss from the condensed consolidated statements of
operations, comprehensive loss was $18.3 million and $492,000 for the three
months ended March 31, 2000 and 1999, respectively.

NOTE 5. SEGMENT REPORTING

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company operates in one segment, business-to-business
electronic commerce. The Company markets its services in the United States and
in foreign countries through its sales personnel and its subsidiaries.

Revenues are attributed to countries based on the location of the Company's
customers. For the three months ended March 31, 2000 and 1999, over 90% of the
Company's revenues and assets were derived from its operations within the United
States.

NOTE 6. SECURITIES CLASS ACTION COMPLAINT

Ten securities fraud class action complaints have been filed against the
Company and three executive officers in federal court in Pittsburgh,
Pennsylvania. The complaints allege that the Company and the other defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 because
they allegedly knew that General Motors Corporation would terminate its contract
with the Company by the first quarter of 2000 and allegedly concealed this
information.

By order dated February 29, 2000, the court consolidated all of the cases
into a single proceeding. On April 29, 2000, the lead plaintiffs filed a
consolidated amended complaint which supersedes all of the earlier-filed
complaints. The consolidated amended complaint contains the same allegations as
those asserted in the earlier

7
<PAGE> 8
FREEMARKETS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

complaints. The Company and the individual defendants believe that these
allegations misstate the facts and are completely without merit, and they intend
to vigorously defend the litigation.

NOTE 7. SUBSEQUENT EVENT

In April 2000, the Company entered into a five-year agreement with Visteon
Corporation ("Visteon"). Under the terms of the agreement, Visteon will pay the
Company a fixed monthly fee for access to its business-to-business eMarketplace.
In connection with entering into this agreement, the Company issued a warrant to
Visteon, with an exercise price of $.01 per share, to purchase 1,750,000 shares
of the Company's common stock, which will result in total stock-based expense of
$95.5 million amortized on a straight-line basis over five years, beginning in
the quarter ending June 30, 2000.

8
<PAGE> 9

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

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and related notes contained in this Quarterly
Report on Form 10-Q ("Form 10-Q").

Certain statements contained in this Form 10-Q, other securities filings,
press releases, interviews and other public statements that are not historical
facts, including those statements that refer to our plans, prospects,
expectations, strategies, intentions, hopes and beliefs, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You should not place undue reliance on these
forward-looking statements. These statements involve risks, uncertainties and
other factors, including those described below and elsewhere in this Form 10-Q,
that may cause our actual results to differ materially from any expressed or
implied by these forward-looking statements. We assume no obligation to update
these forward-looking statements as circumstances change in the future. In some
cases, you can identify forward-looking statements by terminology such as "may",
"will", "should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue", or the negative of these terms or other
comparable terminology.

OVERVIEW

FreeMarkets creates business-to-business online auctions for buyers of
industrial parts, raw materials, commodities and services. We have executed
online auctions for over $5.4 billion of purchase orders to date, and created
potential estimated savings of more than $1 billion for our customers. Since
1995, we have created online auctions for products in more than 100 supply
verticals, including injection molded plastic parts, commercial machinings,
metal fabrications, chemicals, printed circuit boards, corrugated packaging and
coal. More than 4,000 suppliers from over 50 countries have participated in our
auctions.

DETERMINATION OF AUCTION VOLUME AND ACHIEVABLE SAVINGS

We believe that one indicator of our market acceptance is the estimated
dollar volume of materials, commodities and services that we auction for our
customers. We measure this auction volume by multiplying the lowest bid price
per unit in each auction by the estimated number of units that our customer
expects to purchase. When our customers specify multi-year purchases in a
request for quotation, we calculate auction volume for the estimated term.

Auction volume does not necessarily correlate with either our revenues or
our operating results in any particular period due to the seasonality of our
customers' purchasing needs, the timing of the addition of new customers, the
length of the customer contracts and the industry in which the auctioned items
will be used. We believe that auction volume may be correlated with revenues and
operating results over periods of one year or longer; however, because of our
limited operating history, a strong correlation has not yet been demonstrated.
Moreover, auction volume has varied in the past, and we expect it to vary in the
future. The following table sets forth our auction volume for the periods
indicated:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
2000 1999
------ ----
(IN MILLIONS)
<S> <C> <C>
Auction volume........................................ $1,355 $221
</TABLE>

We believe that the savings achievable by customers through our auctions is
an indicator of the effectiveness of our auction services. To estimate these
savings, we compare the last price paid by our customer for the auctioned items
against the lowest bid price for those items in our auction. Actual savings that
our customers achieve may not equal these estimates because our customer may not
select the lowest bid price, the parties may agree to change price terms after
our auction or our customer may not actually buy all or any of the auctioned
items.

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<PAGE> 10

Some of our agreements with customers provide for incentive compensation
based on auction volume and/or savings. These agreements may define auction
volume or savings differently than the methods we use to calculate auction
volume and savings.

REVENUES

We generate revenues under service agreements with our customers. Our
service agreements typically provide us with revenues from fixed monthly fees,
and may also include performance incentive payments, based on volume and/or
savings. The revenue structure in a particular service agreement may vary,
depending upon the needs of our customer and the conventional practices in the
supply market where our customer obtains its materials, commodities or services.
The monthly fees that we receive are for the use of our technology, supplier and
supply market information, market making and market operations staff and
facilities. Negotiated monthly fees vary by customer, and reflect both the
anticipated auction volume and the staffing, expertise and technology we
anticipate committing to complete the services requested by our customers. For
the three-month periods ended March 31, 2000 and 1999, fixed monthly fees
constituted a majority of our revenues, and we expect that these monthly fees
will continue to constitute a majority of our revenues. We recognize revenues
from our fixed monthly fees ratably as we provide services. Our agreements range
in length from a few months to as many as five years. At any given time, we have
agreements of varying lengths with staggered expirations. Our service agreements
generally permit early termination by our customers without penalty.

Some of our agreements include performance incentive payments that are
contingent upon our customer achieving specific auction volume and/or savings,
as set forth in the respective agreements. We recognize these revenues as the
thresholds are achieved. The majority of our agreements entered into since
January 1999 include incentive payment provisions. We expect that as our auction
volume grows, the revenues attributable to these incentive payments will also
grow over time in terms of absolute dollars but not necessarily as a percentage
of revenues.

LIMITED OPERATING HISTORY

Our limited operating history makes predicting future operating results
very difficult. We believe that you should not rely on the period-to-period
comparison of our operating results to predict our future performance. You must
consider our prospects in light of the risks, expenses and difficulties
encountered by companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties. Although we have
experienced significant percentage growth in revenues in recent periods, we may
not be able to sustain our prior growth rates. Our prior growth may not be
indicative of future operating results.

CUSTOMER CONCENTRATION

We depend on United Technologies for a substantial portion of our revenues.
This customer represented 18% of our revenues during the quarter ended March 31,
2000 and 52% of our revenues during the quarter ended March 31, 1999. We
anticipate that we will continue to diversify our base of customers by adding
new customers and increasing sales to existing customers, and that the
percentage of total revenues we derive from United Technologies will continue to
decrease.

RESULTS OF OPERATIONS

Net loss for the quarter ended March 31, 2000 was $18.1 million, or $.51
per diluted share. Excluding stock-based expense and non-cash
acquisition-related charges for goodwill amortization and the write-off of
in-process research and development, net loss was $8.4 million, or $.24 per
diluted share. Exclusive of non-cash acquisition-related charges, the impact of
the acquisitions of iMark and Surplus Record was not material to the Company's
results of operations for the quarter ended March 31, 2000. Net loss for the
quarter ended March 31, 1999 was

10
<PAGE> 11

$492,000, or $.04 per diluted share. The following table sets forth condensed
consolidated statement of operations data as a percentage of revenues for the
periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
------- ------
<S> <C> <C>
Revenues.................................................. 100.0% 100.0%
Cost of revenues.......................................... 58.6 44.7
------ -----
Gross profit......................................... 41.4 55.3
Operating costs:
Research and development................................ 26.7 15.9
Sales and marketing..................................... 68.7 17.0
General and administrative.............................. 47.8 35.5
Stock-based expense..................................... 2.1 --
Goodwill amortization................................... 19.8 --
Write-off of in-process research and development........ 68.4 --
------ -----

Operating loss....................................... (192.1) (13.1)

Other income (expense), net............................... 24.3 (1.0)
------ -----

Net loss............................................. (167.8%) (14.1%)
------ -----
------ -----
</TABLE>

THREE MONTHS ENDED MARCH 31, 2000 AND 1999

All references to "Q1 2000" and "Q1 1999" are for the three months ended
March 31, 2000 and 1999, respectively.

REVENUES

Revenues increased 209% from $3.5 million in Q1 1999 to $10.8 million in Q1
2000. The increase in revenues is primarily attributable to an increased number
of new customers for which we conducted auctions, as well as increased use of
our services by existing customers. The number of customers served increased
from eight in Q1 1999 to 47 in Q1 2000. One additional indicator of our market
acceptance is the estimated dollar volume of materials, commodities and services
that we auction for our customers. Auction volume increased from $221.0 million
in Q1 1999 to $1.4 billion in Q1 2000.

COST OF REVENUES

Cost of revenues increased from $1.6 million in Q1 1999 to $6.3 million in
Q1 2000. As a percentage of revenues, cost of revenues increased from 45% to
59%. The increase in absolute dollar amounts from Q1 1999 to Q1 2000 reflects an
increase in the number of market making staff and the increased cost of our
operations due to a relocation of our headquarters to a larger facility and the
expansion of our services into international locations.

The increase in cost of revenues as a percentage of revenues is primarily
the result of our rapid growth in the number of customers served from eight in
Q1 1999 to 47 in Q1 2000, many of which enter into short-term agreements with us
initially in order to try our services before committing to longer-term
relationships. Generally, we invest a significant amount of time and resources
early in a customer relationship. Therefore, our gross margins are typically
lower in the early stages of a customer relationship.

The increase in cost of revenues as a percentage of revenues was partially
offset by increased staff productivity, as our personnel became more specialized
in various market making activities. Also, we have attained some operating
efficiencies from our investments in information tools to automate portions of
our market making process. Although we will continue to invest in the growth of
our business, we expect gross margins to increase in the future.

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<PAGE> 12

OPERATING COSTS

RESEARCH AND DEVELOPMENT. Research and development costs increased from
$555,000, or 16% of revenues in Q1 1999, to $2.9 million, or 27% of revenues in
Q1 2000. The increase both in absolute dollars and as a percentage of revenues
relates primarily to an increase in the number of research and development staff
and associated costs for the continued development of our BidWare software and
other market making technology designed to further improve staff productivity.
We expect to increase our research and development costs in absolute dollars in
future periods to invest in new technology for future product and service
offerings and to adapt and add features to our existing technology.

SALES AND MARKETING. Sales and marketing costs increased from $593,000, or
17% of revenues in Q1 1999, to $7.4 million, or 69% of revenues in Q1 2000. The
increase both in absolute dollars and as a percentage of revenues reflects a
significant ramp-up in sales and marketing staff, public relations costs, trade
shows and advertising as we pursued our brand and business development strategy
and accelerated our spending on potential future growth. As a result, sales and
marketing costs in Q1 2000 included certain costs not incurred in Q1 1999, such
as those for advertising in professional trade magazines, airport advertising
and other promotions. We expect to continue to increase our sales and marketing
costs in absolute dollars in future periods to promote our brand, to pursue our
business development strategy and to increase the size of our sales force.

GENERAL AND ADMINISTRATIVE. General and administrative costs increased from
$1.2 million, or 36% of revenues in Q1 1999, to $5.2 million, or 48% of revenues
in Q1 2000. The increase both in absolute dollars and as a percentage of
revenues is primarily attributable to the addition of personnel to our general
and administrative staff in the areas of technical operations, human resources,
legal, finance and facilities management. The increase is also attributable to
start-up costs of $287,000 and other recurring costs of $446,000 associated with
our international subsidiaries. We expect that general and administrative costs
will continue to increase in absolute dollars in future periods as we continue
to add staff and infrastructure to support our expected domestic and
international business growth and bear the increased costs associated with being
a public company; however, we anticipate these costs will decrease as a
percentage of revenues in future periods.

STOCK-BASED EXPENSE. We recorded $2.0 million of unearned stock-based
compensation related to employee stock options granted in June and July 1999. In
Q1 2000, $226,000 was amortized related to these grants.

GOODWILL AMORTIZATION. In connection with our acquisitions of iMark and
Surplus Record in March 2000, we recorded goodwill of $354.2 million, of which
$2.1 million was amortized in Q1 2000. We expect quarterly goodwill amortization
related to these acquisitions to be $29.5 million over the next three years.

WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. Also in connection with
our acquisition of iMark in March 2000, we recorded a one-time write-off of
in-process research and development of $7.4 million.

OTHER INCOME (EXPENSE), NET

Other expense was $35,000 in Q1 1999 compared to income of $2.6 million in
Q1 2000. The increase was primarily attributable to increased interest income
from the investment of proceeds from our initial public offering in December
1999 into interest-bearing, investment grade securities.

LIQUIDITY AND CAPITAL RESOURCES

We have historically satisfied our cash requirements primarily through a
combination of revenues, equity financing transactions and bank borrowings. In
December 1999, we closed our initial public offering, which resulted in net
proceeds of $182.2 million. As of March 31, 2000, we had cash and cash
equivalents of $102.2 million, short-term investments of $72.1 million and
working capital of $167.8 million.

Net cash provided by operating activities totaled $127,000 in Q1 1999,
while net cash used in operating activities totaled $11.8 million in Q1 2000.
The use of cash in Q1 2000 related primarily to the operating loss generated by
our investment in the growth of our business, including an increase in personnel
from 151 as of March 31, 1999 to 497 as of March 31, 2000. In addition, in March
1999, we began leasing a significantly larger

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corporate headquarters facility. The lease, which runs through May 2010,
currently requires an annual lease payment of $1.9 million. Our lease payments
will grow as we take additional office space.

Net cash used in investing activities totaled $1.4 million in Q1 1999 and
$60.1 million in Q1 2000. Our use of cash in investing activities in Q1 1999 and
Q1 2000 resulted primarily from our continued additions to and upgrade of
computing and telecommunications equipment. Also in Q1 2000, we used $39.2
million to purchase short-term investments and $16.7 million related to
acquisitions that closed in March 2000.

Net cash provided by financing activities totaled $2.0 million in Q1 1999,
while net cash used in financing activities totaled $3.1 million in Q1 2000. The
positive financing cash flows in Q1 1999 primarily reflect the net proceeds from
bank borrowings and from the exercise of stock options and warrants. In Q1 2000,
our negative financing cash flows primarily related to the repayment of debt
associated with the acquisition of iMark in March 2000.

We currently have in place a $10.0 million bank credit facility, consisting
of a $5.0 million revolving line of credit, all of which was available as of
March 31, 2000, and two equipment loans totaling $5.0 million, of which $4.5
million was outstanding as of March 31, 2000. The line of credit and equipment
loans bear interest at the prime rate of lending. The line of credit expires in
September 2000, and the equipment loans are payable over 36-month terms expiring
in August 2002 and March 2003.

Our bank credit facility contains restrictive covenants, including a
limitation on incurring additional indebtedness and paying dividends. We are
also required to satisfy minimum tangible net worth and current and debt service
ratios each month. We have pledged substantially all of our tangible assets as
collateral for the bank credit facility.

Capital expenditures were $1.4 million in Q1 1999 and $3.6 million in Q1
2000. Capital expenditures over these periods were primarily made to purchase
computer and telecommunications equipment and for furnishings in our new
corporate headquarters and other offices, as well as for expansion of our
network and server capacity. We funded these capital expenditures through a
combination of sales of our equity securities and bank borrowings. We intend to
fund future capital expenditures through a combination of proceeds from our
initial public offering and bank borrowings. We anticipate an increase in our
capital expenditures over future periods consistent with growth in our
operations, infrastructure and personnel.

We expect to experience significant growth in our operating costs for the
foreseeable future in order to execute our business plan, particularly in the
areas of research and development and sales and marketing. We also expect to
open new domestic and international offices in order to support the needs of our
existing and anticipated clients. As a result, we estimate that these operating
costs, as well as other planned expenditures, will constitute a significant use
of our cash resources. In addition, we may use cash resources to fund
acquisitions of complementary businesses and technologies. We believe that our
current cash resources will be sufficient to meet our working capital and
capital expenditures for at least the next 12 months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event that
additional financing is required, we may not be able to raise it on terms
acceptable to us, if at all.

YEAR 2000 ISSUES

We have dedicated resources over the past year to address the potential
hardware, software and other computer and technology issues and related concerns
associated with the transition to the Year 2000 and to confirm that our service
providers took similar measurers. As a result of those efforts, we have not
experienced any material disruptions in our operations in connection with the
transition to the Year 2000.

RECENT EVENTS

In April 2000, we entered into a five-year agreement with Visteon
Corporation ("Visteon"). Under the terms of the agreement, Visteon will pay us a
fixed monthly fee, which is larger than any other current customer contract, for
access to our business-to-business eMarketplace. In connection with entering
into this agreement, we issued a warrant to Visteon, with an exercise price of
$.01 per share, to purchase 1,750,000 shares of our common

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stock, which will result in total stock-based expense of $95.5 million amortized
on a straight-line basis over five years, beginning in the quarter ending June
30, 2000.

RECENT ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133,
which is effective, as amended, for all quarters in fiscal years beginning after
June 15, 2000, establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. We do not expect the adoption of this standard
to have a significant impact on our consolidated financial statements.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

Set forth below and elsewhere in this Form 10-Q and in the other documents
we file with the Securities and Exchange Commission are risks and uncertainties
that could cause actual results to differ materially from the results
contemplated by the forward-looking statements contained in this Form 10-Q.

OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT; IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE

Our quarterly operating results have varied significantly in the past, are
prone to significant fluctuations and will likely vary significantly in the
future. We believe that quarter-to-quarter comparisons of our results of
operations are not meaningful, and you should not rely upon them as indicators
of future performance. Our operating results will likely fall below the
expectations of securities analysts or investors in some future quarter or
quarters. As a result, the price of our common stock may fall.

Our quarterly revenues often fluctuate because we depend on a relatively
small number of customers. We recognize a portion of our revenues from service
agreements on a monthly basis as we provide services; the remainder may be
contingent on successfully achieving agreed-upon volume and savings objectives.
As a result, our quarterly operating results may continue to fluctuate
significantly based on the size and timing of monthly fees and based on any
contingent compensation we earn.

OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, AND WE CANNOT
ASSURE YOU THAT WE WILL BE ABLE TO COMPETE EFFECTIVELY

The market for business-to-business electronic commerce products and
services is intensely competitive. If we cannot compete successfully, our
business will suffer reduced revenues and net income. As one of a number of
companies providing services or products to the market for business-to-business
electronic commerce, we face the risk that existing and potential customers may
choose to purchase competitors' services. If they do, then our revenues and net
income will be reduced. Given that barriers to entry are low, we expect
competition to intensify as new competitors enter the market.

Furthermore, in recent months, many industrial companies have announced
their intentions to establish their own business-to-business exchanges. Our
current customers or prospective customers may also establish their own
exchanges. These exchanges may provide auction functionality and other services
similar to ours and may diminish the need for our services. While we do not know
the effect that these exchanges may have on the market for online auction
services, it is possible that the existence of these exchanges, or even the
anticipated existence of planned exchanges, may result in our losing customers
and revenue and may impair our ability to grow our business.

WE HAVE EXPERIENCED REVENUE CONCENTRATION IN THE PAST; THE LOSS OF OUR LARGEST
CUSTOMERS WOULD REDUCE OUR REVENUES AND NET INCOME AND COULD CAUSE OUR STOCK
PRICE TO FALL

We depend on United Technologies for a substantial portion of our revenues.
Revenue concentration from United Technologies was 18% in Q1 2000 and 52% in Q1
1999. We may not be able to keep United Technologies as a client in the future.
Our agreement with United Technologies expires in December 2000. United

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Technologies may decline to renew the agreement or may terminate it prior to its
expiration upon 30 days' notice. Although United Technologies would be required
to pay us a substantial fee upon early termination, the fee would not compensate
us for the resulting loss of revenues. The loss of United Technologies would
diminish our revenues and operating results, possibly forcing us to curtail our
growth plans and incur greater losses.

In April 2000 we entered into a five-year agreement with Visteon that
provides for a fixed monthly payment stream larger than any other current
customer contract. Although this agreement is not cancelable, it may be
terminated, subject to cure periods, in the event of a breach. Any termination
of our agreement with Visteon, whether or not permitted by the terms of the
agreement, could be harmful to our business.

Revenue concentration from General Motors was 5% in Q1 2000 and 19% in Q1
1999. In January 2000, General Motors notified us that it was exercising its
right to terminate its agreement on 90 days' notice, and the termination of this
agreement became effective in April 2000. Our announcement of General Motors'
notification to us, which we made immediately upon receiving notification from
General Motors of its intention to terminate, caused a significant decrease in
our stock price. Loss of any other significant clients could cause a similar
decrease in our stock price.

THE INTEGRATION OF OUR RECENT ACQUISITIONS MAY INTERFERE WITH OUR OPERATIONS

We recently consummated the acquisitions of iMark.com, Inc., Surplus
Record, Inc. and SR Auction, Inc. We must integrate these entities, employees
and business operations with ours. Certain risks we face in this integration
include:

- the diversion of management's attention to the assimilation of the new
employees and operations;

- difficulties in realizing potential operating synergies;

- retention of new employees;

- challenges in achieving growth in these entities' businesses; and

- potential adverse effects on operating results.

If we fail to complete the integration of these acquired businesses
effectively and efficiently, our business and prospects may suffer.

WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES; IF WE DO, WE MAY BE UNABLE TO
INTEGRATE THEM WITH OUR BUSINESS, OR WE MAY IMPAIR OUR FINANCIAL PERFORMANCE

If appropriate opportunities present themselves, we may acquire additional
businesses, technologies, services or products that we believe are strategic,
and any such acquisitions may be material in size. We may not be able to
identify, negotiate or finance any future acquisition successfully. Even if we
do succeed in acquiring a business, technology, service or product, we have
limited experience in integrating an acquisition into our business. The process
of integration may produce unforeseen operating difficulties and expenditures
and may absorb significant attention of our management that would otherwise be
available for the ongoing development of our business. Moreover, we may never
achieve any of the benefits that we might anticipate from a future acquisition.
If we make future acquisitions, we may issue shares of stock that dilute other
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might harm our financial results and cause our stock price to decline. Any
financing that we might need for future acquisitions may only be available to us
on terms that restrict our business or that impose costs that reduce our net
income.

WE USE SIGNIFICANTLY MORE CASH THAN WE GENERATE

Since our inception, our operating and investing activities have used more
cash than they have generated. Because we will continue to need substantial
amounts of working capital to fund the growth of our business, we expect to
continue to experience significant negative operating and investing cash flows
for the foreseeable future. We may need to raise additional capital in the
future to meet our operating and investing cash requirements. We

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may not be able to find additional financing, if required, on favorable terms or
at all. If we raise additional funds through the issuance of equity,
equity-related or debt securities, these securities may have rights, preferences
or privileges senior to those of the rights of our common stock, and our
stockholders may experience additional dilution to their equity ownership.

WE ANTICIPATE FUTURE LOSSES

We experienced losses for the partial year 1995 and in 1996 and 1997. We
achieved a modest profit in 1998, but incurred losses in 1999 and Q1 2000 as a
result of our efforts to invest in the actual and anticipated growth of our
business. Our profitability will depend on whether we can increase revenues
while controlling expenses. We may not achieve profitability in the future, or
sustain any future profitability.

CUSTOMERS MAY NOT PURCHASE OUR SERVICES IF WE ARE UNABLE TO GENERATE SIGNIFICANT
SAVINGS

If our online auction services increase the efficiency of any particular
supply market, the future likelihood of significant savings to our customers in
that market may decrease. Factors beyond our control may limit our ability to
generate savings. If the magnitude of savings in particular product categories
decreases, we may have difficulty in the future selling our auction services to
buyers in those markets, or attracting willing suppliers in other markets,
either of which will reduce our revenues and net income.

OUR SPENDING ON INCREASED CAPACITY PRECEDES OUR RECEIPT OF REVENUES; THIS COULD
CAUSE OUR GROSS MARGINS TO BE VOLATILE

We must hire personnel, acquire equipment and expand our facilities in
anticipation of receiving revenues in future periods. Because many of our
expenses for these activities are components of our cost of revenues, our gross
margins could be volatile.

WE MAY NOT BE ABLE TO ADJUST OUR SPENDING QUICKLY; IF WE CANNOT, THEN OUR NET
INCOME WILL BE REDUCED

We plan to increase expenditures for our sales and marketing efforts,
development of new technology, capital improvements to our facilities and
improvement of our operational and financial systems. The historical financial
information upon which we can base our planned operating costs and capital
expenditures is very limited and may not be meaningful. Our planned expense
levels are relatively fixed in the short term and are based on our anticipation
of future revenues. We may not be able to forecast revenues accurately due to
our limited operating history. If we fail to predict revenues accurately in
relation to our planned expense levels, then we may be unable to adjust our
costs in a timely manner in response to lower-than-expected revenues, and our
net income will be negatively affected.

WE MAY NOT BE ABLE TO HIRE OR RETAIN QUALIFIED STAFF

If we cannot attract and retain adequate qualified and skilled staff, the
growth of our business may be limited. Our ability to provide services to
customers and grow our business depends, in part, on our ability to attract and
retain staff with college and graduate degrees as well as professional
experiences that are relevant for market making, technology development and
other functions we perform. Competition for personnel with these skill sets is
intense. Some technical job categories are under conditions of severe shortage
in the United States. In addition, restrictive immigration quotas could prevent
us from recruiting skilled staff from outside the United States. We may not be
able to recruit or retain the caliber of staff required to carry out essential
functions at the pace necessary to sustain or grow our business.

THE CAPACITY CONSTRAINTS OF OUR PERSONNEL AND TECHNOLOGY RESOURCES MAY LIMIT OUR
GROWTH

If we are unable to undertake new business due to a shortage of staff or
technology resources, our growth will be impeded. Our customers are typically
large enterprises. At times, these customers ask us to pursue projects that put
a strain on our resources, both in terms of people and technology. At the same
time, penetration of new product categories often requires that we build up a
significant database of new information. This, too, often requires a substantial
amount of time from our market making staff. If our staff does not have the time
to
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find and assimilate this new information, we may not be able to extend our
services to new product categories. Therefore, there may be times when our
opportunities for revenue growth may be limited by the capacity of our internal
resources rather than by the absence of market demand.

FAILURE TO MANAGE OUR GROWTH COULD REDUCE OUR REVENUES OR NET INCOME

Rapid expansion strains our infrastructure, management, internal controls
and financial systems. We may not be able to effectively manage our present
growth or any future expansion. We have recently experienced significant growth,
with our revenues for Q1 2000 increasing 209% compared to Q1 1999. To support
our growth, we have hired the majority of our employees within the last year.
This rapid growth has also strained our ability to integrate and properly train
our new employees. Inadequate integration and training of our employees may
result in underutilization of our workforce and may reduce our revenues or net
income.

OUR SALES CYCLE IS LONG AND UNCERTAIN AND MAY NOT RESULT IN REVENUES; FACTORS
OUTSIDE OF OUR CONTROL MAY AFFECT THE DECISION TO PURCHASE OUR SERVICES

Our sales cycle is long, typically taking from two to 12 months from
initial customer contact until we sign a contract. Not every potential customer
that we solicit actually purchases our services. Because we offer a new method
of industrial purchasing, we must educate potential customers on the use and
benefits of our services. We need to spend a significant amount of time with
multiple decision makers in a prospective customer's organization to sell our
services. Other factors that contribute to the length and uncertainty of our
sales cycle and that may reduce the likelihood that customers will purchase our
services include:

- budgeting constraints;

- incentive structures that do not reward decision makers for savings
achieved through cost-cutting;

- the strength of pre-existing supplier relationships;

- competition from other providers of online auction and electronic
procurement services; and

- an aversion to new purchasing methods.

If we are unable to enter into service agreements with customers on a
consistent basis, then our business may suffer from diminished revenues.

IF OUR SHORT-TERM SERVICE AGREEMENTS DO NOT LEAD TO LONG-TERM SERVICE
AGREEMENTS, OUR BUSINESS MAY NOT BE PROFITABLE

Frequently, we begin a relationship with a new customer by entering into a
short-term service agreement that we hope will lead to a long-term service
agreement. Failure to move a sufficient number of customers from short-term to
long-term service agreements would hurt our operating results. Our initial
agreement with a customer usually involves a period of trial and evaluation with
relatively small volume auctions. This initial period, in which we learn about
our customer's business and its related product categories and educate our
customer about the best use of our services for its organization, requires a
very significant expenditure of our time and resources. A subsequent longer-term
service agreement often involves more frequent and larger volume auctions.
Customers may decide not to enter into a long-term service agreement with us, or
may delay entering into such an agreement until a later time. Because we invest
a significant amount of time and resources early in a customer relationship, our
gross margins are typically lower at the outset of a relationship than the
margins we may achieve later. Further, we may be diverting personnel from
higher-margin opportunities to develop a new relationship, without any assurance
that the new relationship will endure.

FACTORS OUTSIDE OUR CONTROL COULD RESULT IN DISAPPOINTING AUCTION RESULTS;
DISAPPOINTED CUSTOMERS MAY CANCEL OR FAIL TO RENEW THEIR AGREEMENTS WITH US

The actual savings achieved in any given auction vary widely and depend
upon many factors outside of our control. These factors include:

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- the current state of supply and demand in the supply market for the
products being auctioned;

- the past performance of our customer's purchasing organization in
negotiating favorable terms with suppliers;

- the willingness of a sufficient number of qualified suppliers to bid for
business using our auction services;

- reductions in the number of suppliers in particular markets due to
mergers, acquisitions or suppliers exiting from supply industries; and

- seasonal and cyclical trends that influence all industrial purchasing
decision making.

Because factors outside of our control affect a customer's perception of
the value of our services, customers may cancel our service agreements or choose
not to renew them, even if we have performed well. Any non-renewal or
cancellation of service agreements may reduce our revenues and net income.

FAILURES OF HARDWARE SYSTEMS OR SOFTWARE COULD UNDERMINE OUR CUSTOMERS'
CONFIDENCE IN OUR RELIABILITY

A significant disruption in our online auction service could seriously
undermine our customers' confidence in our business. Our customers hold us to a
high standard of reliability and performance. From time to time, we have
experienced service interruptions during online auctions, with the most
significant being a breakdown in the computer network over which our auctions
are conducted. This computer network is provided to us by an outside vendor, and
this kind of interruption may occur in the future. During these disruptions,
participants may lose their online connection or we may not receive their bids
in a timely manner. Any interruptions in our service may undermine actual and
potential customers' confidence in the reliability of our business.

Conducting an online auction requires the successful technical operation of
an entire chain of software, hardware and telecommunications equipment. This
chain includes our BidWare software, the personal computers and network
connections of bidders, our network servers, operating systems, databases and
networking equipment such as routers. A failure of any element in this chain can
partially or completely disrupt an online auction.

Some of the elements set forth above are not within our control, such as
Internet connectivity and software, hardware and telecommunications equipment we
purchase from others. We frequently have auction participants from outside North
America who may use older or inferior technologies, which may not operate
properly. In addition, hardware and software are potentially vulnerable to
interruption from power failures, telecommunications outages, network service
outages and disruptions, natural disasters, and vandalism and other misconduct.
Our business interruption insurance would not compensate us fully for any losses
that may result from these disruptions.

THE LOSS OF OUR KEY EXECUTIVES WOULD DISRUPT OUR BUSINESS

None of our executive officers or other key employees is bound by an
employment agreement. The loss of any member of our key management team would
significantly disrupt our business. We rely on the leadership and vision of key
members of our senior management team, including:

- Glen Meakem, our President, Chairman, Chief Executive Officer and a
co-founder;

- Sam Kinney, an Executive Vice President and a co-founder;

- David Becker, an Executive Vice President and our Chief Operating
Officer;

- Joan Hooper, a Vice President and our Chief Financial Officer and
Treasurer; and

- Scott Grimes, our Vice President of Corporate Business Development.

Messrs. Meakem and Kinney created FreeMarkets, and they and Messrs. Becker
and Grimes and Ms. Hooper have been instrumental in the management and growth of
our business. The loss of any of these executives could disrupt the Company's
growth.

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IF WE FAIL TO CONTINUALLY IMPROVE OUR TECHNOLOGY, OUR BUSINESS WILL SUFFER

Our services and the business-to-business electronic commerce market are
characterized by rapidly changing technologies and frequent new product and
service introductions. We may fail to introduce new online auction technology on
a timely basis or at all. If we fail to introduce new technology or to improve
our existing technology in response to industry developments, we could
experience frustration from our customers that could lead to a loss of revenues.

Our online auction technology is complex, and accordingly may contain
undetected errors or defects that we may not be able to fix. In the past, we
have discovered software errors in new versions of our BidWare software after
their release. Further, any new technology we implement, including, for example,
FreeMarketPlace, may not achieve the results or gain the market acceptance we
anticipate. Reduced market acceptance of our services or our software due to
errors or defects in our technology would harm our business by reducing our
revenues.

IF WE DO NOT ADEQUATELY MAINTAIN OUR CUSTOMERS' CONFIDENTIAL INFORMATION, OUR
REPUTATION COULD BE HARMED AND WE COULD INCUR LEGAL LIABILITY

Any breach of security relating to our customers' confidential information
could result in legal liability for us and a reduction in use or cancellation of
our online auction services, either of which could materially harm our business.
Our personnel receive highly confidential information from buyers and suppliers
that is stored in our files and on our computer systems. For example, we often
possess blueprints and product plans that could be valuable to our customers'
competitors if misappropriated. Similarly, we receive sensitive pricing
information that has historically been maintained as a matter of utmost
confidence within buyer and supplier organizations. We enter into standard
non-disclosure and confidentiality agreements with virtually all customers with
whom we deal.

We currently have practices and procedures in place to ensure the
confidentiality of our customers' information. However, our security procedures
to protect against the risk of inadvertent disclosure or intentional breaches of
security might fail to adequately protect information that we are obligated to
keep confidential. We may not be successful in adopting more effective systems
for maintaining confidential information, so our exposure to the risk of
disclosure of the confidential information of others may grow with increases in
the amount of information we possess. If we fail to adequately maintain our
customers' confidential information, some of our customers could end their
business relationships with us and we could be subject to legal liability.

IF WE ARE NOT ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THEN
OTHERS MAY BE ABLE TO DUPLICATE OUR SERVICES

We rely in part upon our proprietary technology, including our BidWare
software, to conduct auctions. Our failure to adequately protect our
intellectual property rights could harm our business by making it easier for
others to duplicate our services. We have applied for patents on aspects of our
auction technology and business processes, but we do not know whether any
patents will be issued. In addition, even if some or all of these patents are
issued, we cannot assure you that they will not be successfully challenged by
others or invalidated, that they will adequately protect our technology and
processes or that they will result in commercial advantages for us. We have also
obtained and applied for Unites States and foreign registrations for some
certain trademarks, domain names and logos, and our software, documentation and
other written materials are copyrighted, but these protections may not be
adequate. Although we require each of our employees to enter into a
confidentiality agreement and some key employees are subject to non-competition
agreements, these agreements may not satisfactorily safeguard our intellectual
property against unauthorized disclosure.

We cannot be certain that third parties will not infringe or misappropriate
our proprietary rights or that third parties will not independently develop
similar proprietary information. Any infringement, misappropriation or
independent development could harm our future financial results. In addition,
effective patent, trademark, copyright and trade secret protection may not be
available in every country where we provide online auction services. We may, at
times, have to incur significant legal costs and spend time defending our
trademarks, copyrights and, if issued, our patents. Any defense efforts, whether
successful or not, would divert both time and resources from the operation and
growth of our business.
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There is also significant uncertainty regarding the applicability to the
Internet of existing laws regarding matters such as property ownership, patents,
copyrights and other intellectual property rights. Legislatures adopted the vast
majority of these laws prior to the advent of the Internet and, as a result,
these laws do not contemplate or address the unique issues of the Internet and
related technologies. We cannot be sure what laws and regulations may ultimately
affect our business or intellectual property rights.

OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS

We do not believe that we infringe the proprietary rights of others, and to
date, no third parties have notified us of infringement, but we may be subject
to infringement claims in the future. The defense of any claims of infringement
made against us by third parties could involve significant legal costs and
require our management to divert time from our business operations. Either of
these consequences of an infringement claim could have a material adverse effect
on our operating results. If we are unsuccessful in defending any claims of
infringement, we may be forced to obtain licenses or to pay royalties to
continue to use our technology. We may not be able to obtain any necessary
licenses on commercially reasonable terms or at all. If we fail to obtain
necessary licenses or other rights, or if these licenses are too costly, our
operating results may suffer either from reductions in revenues through our
inability to serve customers or from increases in costs to license third-party
technology.

OTHERS MAY REFUSE TO LICENSE IMPORTANT TECHNOLOGY TO US OR MAY INCREASE THE FEES
THEY CHARGE US FOR THIS TECHNOLOGY

We rely on third parties to provide us with some software and hardware, for
which we pay fees. This software has been readily available, and to date we have
not paid significant fees for its use. These third parties may increase their
fees significantly or refuse to license their software or provide their hardware
to us. While other vendors may provide the same or similar technology, we cannot
be certain that we can obtain the required technology on favorable terms, if at
all. If we are unable to obtain required technology at a reasonable cost, our
growth prospects and operating results may be harmed through impairment of our
ability to conduct business or through increased cost.

FUTURE GOVERNMENT REGULATION OF THE INTERNET AND ONLINE AUCTIONS MAY ADD TO OUR
OPERATING COSTS

Like many Internet-based businesses, we operate in an environment of
tremendous uncertainty as to potential government regulation. We believe that we
are not currently subject to direct regulation of online commerce, other than
regulations applicable to businesses generally. However, the Internet has
rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing regulations to the Internet environment. Laws
and regulations may be introduced and court decisions reached that affect the
Internet or other online services, covering issues such as user pricing, user
privacy, freedom of expression, access charges, content and quality of products
and services, advertising, intellectual property rights and information
security. In addition, because we offer our services worldwide and facilitate
sales of goods to customers globally, foreign jurisdictions may claim that we
are required to comply with their laws. Any future regulation may have a
negative impact on our business by restricting our method of operation or
imposing additional costs.

As an Internet company, it is unclear in which jurisdictions we are
actually conducting business. Our failure to qualify to do business in a
jurisdiction that requires us to do so could subject us to fines or penalties
and could result in our inability to enforce contracts in that jurisdiction.

Numerous jurisdictions have laws and regulations regarding the conduct of
auctions and the liability of auctioneers. We do not believe that these laws and
regulations, which were enacted for consumer protection many years ago, apply to
our online auction services. However, one or more jurisdictions may attempt to
impose these laws and regulations on our operations in the future.

WE MAY BECOME SUBJECT TO CERTAIN SALES AND OTHER TAXES THAT COULD ADVERSELY
AFFECT OUR BUSINESS

The imposition of sales, value-added or similar taxes could diminish our
competitiveness and harm our business. We do not collect sales or other similar
taxes for goods purchased through our online auctions. Our

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<PAGE> 21

customers are large purchasing organizations that typically manage and pay their
own sales and use taxes. However, we may be subject to sales tax collection
obligations in the future.

OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS AND UNCERTAINTIES

We face risks in doing business internationally. We provide our services to
international buyers and often have international suppliers participate in our
auctions. We have international subsidiaries located in Europe and in Asia that
serve our customers based abroad as well as the European and Asian operations of
our multinational customers based in the United States. We also plan to
establish similar branches or subsidiaries in other parts of the world. We have
experienced, and expect to continue to experience, significant costs for our
international operations as we add staff and facilities in foreign countries.
These costs, together with the costs of the overhead needed to comply with
legal, regulatory and accounting requirements that differ from those in the
United States, may reduce our net income. Finally, our international operations
are subject to disruption from political and economic instability in the
countries in which they are located, which may interrupt our ability to conduct
business and impose additional costs upon us.

OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
STOCKHOLDERS

The market price for our common stock is highly volatile and subject to
wide fluctuations in response to the risks described above and many other
factors, some of which are beyond our control. The market prices for stocks of
Internet companies and other companies whose businesses are heavily dependent on
the Internet have generally proven to be highly volatile, and particularly so in
recent periods.

SUBSTANTIAL SALES OF OUR COMMON STOCK IN THE FUTURE COULD CAUSE OUR STOCK PRICE
TO FALL

As of March 31, 2000, we had outstanding 37,064,048 shares of common stock.
Most of these shares are currently restricted from resale. However, on June 7,
2000, 26,940,840 of these shares will become available for resale in the public
market. As restrictions on resale end, if the holders of these restricted shares
sell them or if the market perceives that they intend to sell them, the market
price of our common stock could decrease significantly, even if our business is
doing well.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Nearly all of our revenues recognized to date have been denominated in
United States dollars and are primarily from customers in the United States. We
have several subsidiaries located in Europe and Asia, and we intend to establish
other foreign subsidiaries in the future. In the future, a portion of the
revenues we derive from international operations may be denominated in foreign
currencies. We incur costs for our overseas offices in the local currency of
those offices for staffing, rent, telecommunications and other services. As a
result, our operating results could become subject to significant fluctuations
based upon changes in the exchange rates of those currencies in relation to the
United States dollar. Furthermore, to the extent that we engage in international
sales denominated in United States dollars, an increase in the value of the
United States dollar relative to foreign currencies could make our services less
competitive in international markets. Although currency fluctuations are
currently not a material risk to our operating results, we will continue to
monitor our exposure to currency fluctuations and when appropriate, use
financial hedging techniques to minimize the effect of these fluctuations in the
future. We cannot assure you that exchange rate fluctuations will not harm our
business in the future.

Our interest income is sensitive to changes in the general level of United
States interest rates, particularly because the majority of our investments are
in short-term instruments. Borrowings under our existing credit lines are also
interest rate sensitive, because the interest rate charged by our bank varies
with changes in the prime rate of lending. We believe, however, that we are
currently not subject to material interest rate risk.

21
<PAGE> 22

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Since March 16, 2000, the date of the filing of the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 ("Form 10-K"), there have been
no material new legal proceedings involving the Company nor have there been any
material developments in the legal proceedings reported in the Form 10-K, except
as set forth below.

As previously reported, ten securities fraud class action complaints were
filed against the Company and three executive officers in federal court in
Pittsburgh, Pennsylvania, which the court subsequently consolidated into a
single proceeding. On April 29, 2000, the lead plaintiffs filed a consolidated
amended complaint, which supersedes all of the earlier-filed complaints. The
consolidated amended complaint contains the same allegations as those asserted
in the earlier complaints. The Company and the individual defendants believe
that these allegations misstate the facts and are completely without merit, and
they intend to vigorously defend the litigation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.1(b) Second Amended and Restated Registration Rights Agreement
dated as of March 23, 2000.
27.1 Financial Data Schedule.
</TABLE>

(b) Reports on Form 8-K.

None.

* * * * * *

22
<PAGE> 23

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Pittsburgh, Commonwealth of Pennsylvania on May 10, 2000.

FREEMARKETS, INC.

By: /s/ JOAN S. HOOPER
------------------------------------
JOAN S. HOOPER
Chief Financial Officer
(Principal Financial and Accounting
Officer)

23
<PAGE> 24

INDEX TO EXHIBITS

<PAGE> 1
Exhibit 4.1(b)

SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

This Second Amended and Restated Registration Rights Agreement (the
"Second Restated Agreement") is made and entered as of this 23rd day of March,
2000 by and among FreeMarkets, Inc., a Delaware corporation (the "Company"), and
the parties listed on Schedule A hereto (the "Existing Security Holders") and
the parties listed on Schedule B hereto (the "New Security Holders" and together
with the Existing Security Holders, the "Security Holders").

R E C I T A L S

WHEREAS, the Existing Security Holders and the Company are parties to
an Amended and Restated Registration Rights Agreement dated August 3, 1999 (the
"First Restated Agreement");

WHEREAS, the First Restated Agreement relates to the registration,
under the Securities Act of 1933, as amended, of certain securities owned by the
Existing Security Holders;

WHEREAS, in connection with the acquisition by the Company of
iMark.com, Inc. ("iMark") pursuant to the Agreement and Plan of Merger dated as
of March 14, 2000 (the "iMark Merger Agreement"), the Company and the Existing
Security Holders desire to further amend and restate the First Restated
Agreement in order, among other things, to add the New Security Holders to the
Second Restated Agreement and to grant certain registration rights to the New
Security Holders on the terms and conditions set forth herein;

WHEREAS, the Company and the Existing Security Holders have agreed that
this Restated Agreement shall supersede the First Restated Agreement in its
entirety and that the rights and obligations of the parties with respect to the
registration of the Registrable Securities (as defined below) shall be governed
solely by this Second Restated Agreement;

WHEREAS, the Existing Security Holders who are executing counterpart
signature pages to this Second Restated Agreement have the requisite power and
authority to amend and restate the First Restated Agreement pursuant to the
terms thereof.

NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Security
Holders hereby agree as follows:

1. Certain Definitions. As used in this Second Restated Agreement, the
following terms shall have the following meanings:

<PAGE> 2

(a) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banks in the State of New York are required or
permitted to close.

(b) "Common Stock" shall mean the Common Stock, par value
$0.01 per share, of the Company.

(c) "Form S-3 Eligibility Date" means the date on which the
Company becomes eligible to file a registration statement on Form S-3 under the
1933 Act.

(d) "Holder" means a Security Holder and any assignee of the
rights of such Security Holder in accordance with Section 13(d) of this Second
Restated Agreement.

(e) "iMark Merger Shares" means (i) prior to the Form S-3
Eligibility Date, 50% of the shares of Common Stock, other than Lock-Up Shares,
issued to the former stockholders of iMark pursuant to the iMark Merger
Agreement, (ii) following the Form S-3 Eligibility Date, 100% of the shares of
Common Stock, including Lock-Up Shares, issued to the former stockholders of
iMark pursuant to the iMark Merger Agreement, and (iii) in the event of an
underwritten public offering prior to the Form S-3 Eligibility Date, 100% of the
shares of Common Stock, other than Lock-Up Shares, issued to the former
stockholders of iMark pursuant to the iMark Merger Agreement.

(f) "Lock-Up Shares" means shares of Common Stock which are
subject to lock-up arrangements entered into by certain former stockholders of
iMark in connection with the acquisition of iMark by the Company pursuant to the
iMark Merger Agreement.

(g) "Prospectus" shall mean the prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement
with respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and by all other amendments
and supplements to the prospectus, including post- effective amendments and all
material incorporated by reference in such prospectus.

(h) "Series A Preferred Stock" shall mean the Series A-1
Convertible Preferred Stock, par value $.01 per share, of the Company, and
Series A-2 Convertible Preferred Stock, par value $.01 per shares, of the
Company.

(i) "Series B Preferred Stock" shall mean the Series B
Convertible Preferred Stock, par value $.01 per share, of the Company.

(j) "Series C Preferred Stock" shall mean the Series C
Convertible Preferred Stock, par value $.01 per share, of the Company.

(k) "Series D Preferred Stock" shall mean the Series D
Convertible Preferred Stock, par value $.01 per share, of the Company.

<PAGE> 3

(l) "Register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the 1933 Act (defined below), and, unless
the context otherwise requires, the declaration or ordering of effectiveness of
such registration statement or document.

(m) "Registrable Securities" shall mean (i) Common Stock
acquired upon the conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Warrants, as
defined, (ii) Common Stock owned by American Express Travel Related Services or
Stephen Getsy, (iii) Common Stock owned by Glen T. Meakem and Sam E. Kinney,
Jr., (iv) iMark Merger Shares, and (v) any Common Stock of the Company issued as
(or issuable upon the conversion, exchange or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such Common Stock; provided,
however, that "Registrable Securities" shall not include (A) any shares that
have previously been registered or sold to the public; (B) any securities of the
Company which may be sold pursuant to Rule 144 (k) under the 1933 Act or any
successor rule; or (C) Lock-Up Shares; provided, further, the iMark Merger
Shares owned by any former stockholder of iMark shall be deemed "Registrable
Securities" only to the extent that such former stockholder has executed a
counterpart signature page to this Second Restated Agreement.

(n) "Registration Statement" shall mean any registration
statement of the Company that covers any of the Registrable Securities pursuant
to the provisions of this Restated Agreement, including the Prospectus,
amendments and supplements to such Registration Statement, including
post-effective amendments, all exhibits and all material incorporated by
reference in such registration statement.

(o) "SEC" means the U.S. Securities and Exchange Commission.

(p) "1933 Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.

(q) "1934 Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.

(r) "Warrants" shall mean warrants (i) issued by the Company
to United Technologies Corporation, (ii) Saturn Capital, Inc., and (iii)
Wybrook, L.P.

2. Piggyback Registrations.

(a) Right to Piggyback. Whenever the Company proposes to
register any of its securities under the 1933 Act, other than pursuant to a
registration on Forms S-4 or S-8 (or any successor form or forms), the Company
will give 20 days prior written notice to each Holder of Registrable Securities
of the intention to effect such a registration and, subject to the provisions of
subsection (b) hereof, will include in such registration all Registrable
Securities with respect to which the Holder has given notice of request for
inclusion therein to the Company

<PAGE> 4

within 15 days after the Company gives such notice (a "Piggyback Registration");
provided that the Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 2(a) without obligation to any
Holder.

(b) Priority on Piggyback Registration. In the event that any
Piggyback Registration is an underwritten public offering, the number of
Registrable Securities to be included in such an underwriting may be reduced
(pro rata among the Holders of Registrable Securities who have requested
registration of Registrable Securities based upon the number of Registrable
Securities requested to be registered by such Holders) if and to the extent that
the managing underwriter shall advise the Company that such inclusion would
adversely affect the marketing of the securities to be sold by the Company
therein, provided, however, that if any shares are to be included in such
underwriting for the account of any person ("Other Security Holder") other than
the Company or Holders of Registrable Securities, such shares of the Other
Security Holder will be reduced to zero before any reduction shall be made in
the number of Registrable Securities to be included in such registration by all
Holders of Registrable Securities.

3. Demand Registrations. If at any time following the date which is one
hundred eighty (180) days after the initial public offering by the Company, one
or more of the Holders of an aggregate of not less than 20% of the Registrable
Securities ("Initiating Holders") then outstanding shall notify the Company in
writing that it or they intend to offer or cause to be offered for public sale
all or any portion of their Registrable Securities ("Demand Request"), the
Company will notify all other Holders of Registrable Securities (the "Company
Notice"). The Company shall file as soon as practicable, and in any event within
60 days of the receipt of the Demand Request, a registration statement, and use
its best efforts to cause such registration statement to become effective, with
respect to the registration of such Registrable Securities as may be requested
by the Initiating Holders and such other Registrable Securities owned by any
other Holders with respect to which the Company has received written requests
for inclusion within 20 days of the Company Notice. Anything herein to the
contrary notwithstanding, the Company shall be obligated to comply with this
Section 3 on two occasions only. Notwithstanding the foregoing, if the Company
shall furnish to the Initiating Holder(s) a certificate signed by the Chief
Executive Officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company it would be materially detrimental to the
Company and its stockholders for such registration statement to be filed and it
is therefore desirable to defer the filing of such registration statement, the
Company shall have the right to defer taking action with respect to such filing
for a period of 90 days after receipt of the Demand Request.

4. Registration on Form S-3. At such time as the Company is qualified
to register its securities on Form S-3, and in addition to the rights contained
in Section 2, if at any time a Holder or Holders of Registrable Securities (the
"Initiating Form S-3 Holders") requests that the Company file a registration
statement on Form S-3 for a sale or public offering of all or any portion of the
Registrable Securities held by such Initiating Form S-3 Holder or Holders (the
"Form S-3 Demand"), the reasonably anticipated aggregate price to the public of
which would exceed $5,000,000, then the Company (a) will promptly give at least
20 days written notice of the proposed registration to all other Holders and (b)
use its best efforts to register under the

<PAGE> 5

Securities Act on Form S-3, for public sale in accordance with the method of
disposition specified in the Form S-3 Notice, the number of Registrable
Securities specified in such Form S- 3 Notice together with any Registrable
Securities requested to be included by any other Holders joining in such request
as are specified in a written request given within 15 days after receipt of such
written notice from the Company. Notwithstanding the foregoing, if the Company
shall furnish to the Initiating Form S-3 Holder(s) a certificate signed by the
Chief Executive Officer of the Company stating that in the good faith judgment
of the Board of Directors of the Company it would be materially detrimental to
the Company and its stockholders for such registration statement to be filed and
it is therefore desirable to defer the filing of such registration statement,
the Company shall have the right to defer taking action with respect to such
filing for a period of 90 days after receipt of the Form S-3 Demand.

5. Holdback Agreements. Each holder of Registrable Securities agrees
not to effect any public sale or distribution of equity securities of the
Company, or any securities convertible into or exercisable for such securities,
for a period of 180 days beginning on the effective date of any underwritten
registration in which such Holder's Registrable Securities are included (except
as part of such underwritten registration) unless the underwriters managing the
registered public offering otherwise agree; provided, that in no event shall a
holder of Registrable Securities be subject to a limitation on sale or
distribution that covers a period longer than that to which any other security
holder whose securities are included in the registration is subject, and
provided further, that the limitation set forth herein shall not apply to any
securities of the Company which are purchased in a public offering registered
under the 1933 Act or in the open market following an initial public offering by
the Company.

6. Registration Procedures. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Restated Agreement, the Company will as expeditiously as reasonably
possible:

(a) prepare and file with the SEC a Registration Statement
with respect to such Registrable Securities and use its best efforts to cause
such Registration Statement to become effective and to remain continuously
effective for a period which will terminate when all Registrable Securities
covered by such Registration Statement, as amended from time to time, have been
sold or a period of 180 days, whichever is shorter;

(b) prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement and the Prospectus as
may be necessary to keep the Registration Statement effective for the period
specified in Section 6(a) and to comply with the provisions of the 1933 Act and
the 1934 Act with respect to the distribution of all Registrable Securities;
provided that, at a time reasonably prior to the filing of a Registration
Statement or Prospectus, or any amendments or supplements thereto, the Company
will furnish to counsel for the Holders of Registrable Securities included in
such registration, copies of all documents proposed to be filed, which documents
will be subject to the comments of such counsel;

<PAGE> 6

(c) make available for inspection by a representative of the
Holders of Registrable Securities, any underwriter participating in any
distribution pursuant to such registration, and any attorney, accountant or
other agent retained by such representative or underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney,
accountant or agent in connection with such registration statement;

(d) notify the counsel for the Holders of Registrable
Securities included in such registration promptly, and, if requested, confirm
such advice in writing, (i) when the Prospectus or any supplement or
post-effective amendment has been filed, and with respect to the Registration
Statement or any post-effective amendment, when the same has become effective,
(ii) of any request by the SEC for amendments or supplements to the Registration
Statement or the Prospectus or for additional information, (iii) of the issuance
by the SEC of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, and (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose;

(e) make reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement;

(f) deliver to each Holder of Registrable Securities included
in such registration, as the case may be, as many copies of the Registration
Statement and Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto as such holder may reasonably request;

(g) prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the holders of
Registrable Securities and the underwriters, if any, and their respective
counsel in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or blue sky laws of such
jurisdictions as such Holder or any underwriter reasonably requests in writing,
and do any and all other acts or things necessary or advisable to enable the
distribution in such jurisdictions of the Registrable Securities covered by the
Registration Statement; provided that the Company will not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject it to general service of
process in any such jurisdiction where it is not then so subject;

(h) cause all Registrable Securities covered by the
Registration Statement to be listed on each securities exchange, interdealer
quotation system or other market on which similar securities issued by the
Company are then listed; and provide a transfer agent and registrar for all
Registrable Securities included in such Registration Statement and a CUSIP
number for all such Registrable Securities, in each case not later than the
effective date of such registration;

<PAGE> 7

(i) in the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, usual and
customary in form, with the managing underwriter of such offering (the Holders
of Registrable Securities included in such registration, shall also enter into
and perform their obligations under such agreement, usual and customary in
form); and the Company shall take such other actions as the underwriters
reasonably request in order to expedite or facilitate a disposition of the
Registrable Securities;

(j) upon request, furnish to each Holder of Registrable
Securities included in such registration, a signed counterpart, addressed to
such Holder, of (i) an opinion of counsel for the Company, dated the effective
date of such Registration Statement (or, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), and (ii) if permitted, a "comfort" letter, dated the
effective date of such Registration Statement (and, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), signed by the independent public accountants who
have certified the Company's financial statements included in such Registration
Statement;

(k) immediately notify each Holder of Registrable Securities
included in such registration, at any time when a Prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the Prospectus included in such
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing, and at the request of any such Holder, promptly
prepare and furnish to such Holder a reasonable number of copies of a supplement
to or an amendment of such Prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such Prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;

(l) otherwise use its reasonable efforts to comply with all
applicable rules and regulations of the SEC under the 1933 Act and the 1934 Act,
and take such other actions as may be reasonably necessary to facilitate the
registration or the disposition of the Registrable Securities hereunder;

(m) In connection with each registration hereunder, the
Holders of Registrable Securities to be included in the registration will
furnish to the Company in writing such information with respect to themselves
and the proposed distribution by them as reasonably shall be necessary in order
to assure compliance with federal and applicable state securities laws. In
addition, the Holders of Registrable Securities agree that they will not deliver
any form of Prospectus in connection with the sale of any Registrable Securities
as to which the Company has advised such Holders that it is preparing an
amendment or supplement.

7. Expenses. The Company will pay all expenses in connection with any
registration pursuant to Sections 2, 3 and 4, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for the

<PAGE> 8

Company, fees and expenses (including counsel fees) incurred in connection with
complying with state securities or "blue sky" laws, fees of the National
Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents
and registrars, costs of insurance and fees and disbursements of one counsel for
the Holders of Registrable Securities. All underwriting discounts and selling
commissions applicable to the sale of a holder's Registrable Securities will be
paid by such holder.

8. Indemnification.

(a) Indemnification by Company. In connection with any
registration pursuant to this Restated Agreement, the Company agrees to
indemnify and hold harmless, to the fullest extent permitted by law, each Holder
of Registrable Securities included in a registration pursuant to this Restated
Agreement, such Holder's officers, directors, partners and employees and each
person who controls such holder (within the meaning of the 1933 Act) and each
underwriter, if any (including any broker or dealer which may be deemed an
underwriter) and each person who controls any underwriter of the Registrable
Securities against all losses, claims, damages, liabilities, and expenses caused
by (i) any untrue or alleged untrue statement of a material fact contained in
any Registration Statement, Prospectus or any preliminary prospectus or any
amendment or supplement thereto or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any violation by the Company of any
federal, state or common law, rule or regulation applicable to the Company in
connection with any Registration Statement, Prospectus or any preliminary
prospectus, or any amendment or supplement thereto, and shall reimburse, as
incurred, each of the foregoing persons for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claims; provided, however that the indemnity agreement contained in this Section
8(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent shall not unreasonably be withheld), nor shall the
Company be liable to the extent any loss, claim, damage, liability or action
arises out of or is based upon any information furnished in writing to the
Company by any Holder, underwriter or controlling person expressly for use in
connection with such registration.

(b) Indemnification by Holder of Registrable Securities. In
connection with any registration pursuant to the terms of this Restated
Agreement, each Holder of Registrable Securities included in such registration
agrees to indemnify and hold harmless, to the fullest extent permitted by law,
the Company, its directors and officers and each person who controls the Company
(within the meaning of the 1933 Act) against any losses, claims, damages,
liabilities and expense resulting from any untrue statement of a material fact
or any omission of a material fact required to be stated in the Registration
Statement or Prospectus or preliminary prospectus or any amendment or supplement
thereto, or necessary to make the statements therein not misleading, to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information furnished in writing by the Holder of Registrable
Securities to the Company specifically for inclusion in such Registration
Statement or Prospectus and that such information was substantially relied upon
by the Company in preparation of the Registration Statement or Prospectus or any
amendment or supplement thereto. In no event shall the liability

<PAGE> 9

of the Holder of Registrable Securities hereunder be greater in amount than the
lesser of (i) an amount equal to the proportion that the public offering price
of the Registrable Securities sold by the holder in such registration bears to
the total public offering price of all securities sold thereunder or (ii) the
dollar amount of the proceeds (net of all expense paid by such Holder and the
amount of any damages such Holder has otherwise been required to pay by reason
of such untrue statement or omission) received by such Holder upon the sale of
the Registrable Securities pursuant to such registration; provided, however that
the indemnity agreement contained in this Section 8(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Holder (which consent
shall not unreasonably be withheld).

(c) Contribution. If for any reason the indemnification
provided for in the preceding clauses (a) and (b) is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) to
be unavailable to an indemnified party or insufficient to hold it harmless,
notwithstanding the fact that this Section 8 provides for indemnification in
such case, then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of
the indemnified party and the indemnifying party, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.

(d) Survival of Obligations. The obligations of the parties
under this Section 8 shall survive the completion of the offering of Registrable
Securities and shall remain in full force and effect regardless of any
investigation made by or on behalf of any indemnified party.

9. Limitations on Subsequent Registration Rights. From and after the
date of this Restated Agreement, the Company shall not, without the prior
written consent of Holder(s) of 66-2/3% (the "Minimum Percentage") of all
Registrable Securities then held by all Holders, enter into any agreement with
any holder or prospective holder of any securities of the Company giving such
holder or prospective holder any registration rights the terms of which are more
favorable than the registration rights granted to the Holders hereunder;
provided, however, for purposes of calculating the Minimum Percentage, there
shall be excluded from the definition of Registrable Securities all iMark Merger
Shares and all Lock-Up Shares, and the iMark Merger Shares and Lock-Up Shares
shall not be voted for any purpose under this Section 9.

10. Changes in Common Stock. If, and as often as, there is any change
in the Common Stock by way of a stock split, stock dividend, combination or
reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof so that the rights and privileges granted hereby shall
continue with respect to the Common Stock as so changed.

<PAGE> 10

11. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Registrable Securities to the public without registration, the Company agrees
to:

(a) make and keep public information available, as those terms
are understood and defined under the 1933 Act, at all times from and after 90
days following the earlier of the effective date of the Company's first
registration under the 1933 Act or the registration of any class of the
Company's securities under Section 12 of the 1934 Act.

(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and

(c) furnish to each Holder of Registrable Securities forthwith
upon request (i) a written statement by the Company as to its compliance with
the reporting requirements of Rule 144 and of the 1933 Act and the 1934 Act,
(ii) a copy of the most recent annual or quarterly report of the Company, and
(iii) such other reports and documents so filed by the Company as such Holder
may reasonable request in availing itself of any rule or regulation of the
Commission allowing such holder to sell any Registrable Securities without
registration.

12. Amendment and Restatement of First Restated Agreement.

(a) The First Restated Agreement amended and restated the
following agreements (collectively, the "Predecessor Agreements") in all
respects: (i) Article 4 of the Shareholders' Agreement dated July 31, 1995
between the Company and Glen T. Meakem and Sam E. Kinney, as amended, pursuant
to authority granted in Section 5.9 thereof; (ii) Section 7.2.5 of the Purchase
Agreement dated August 17, 1995 between the Company and American Express Travel
Related Services Company, Inc. (as clarified by side letter dated April 7,
1999), pursuant to authority granted in Section 10.3 thereof; (iii) Section 10
of the Stock Subscription Agreement dated September 7, 1995 between the Company
and Stephen Getsy, pursuant to authority granted in Section 8 thereof; (iv)
Registration Rights Agreement dated March 29, 1996 between the Company and the
purchasers of Series A-1 Preferred Stock, as amended to date, pursuant to
authority granted in Section 14(b) thereof; (v) Registration Rights Agreement
dated December 29, 1996 between the Company and the purchasers of Series B
Preferred Stock, as amended to date, pursuant to authority granted in Section
14(b) thereof; and (vi) Registration Rights Agreement dated December 2, 1997
between the Company and the purchasers of Series A-2 Preferred Stock, as amended
to date, pursuant to authority granted in Section 14(b) thereof. The parties
acknowledge that no Security Holder shall have any rights under the Predecessor
Agreements.

<PAGE> 11

(b) This Second Restated Agreement amends and restates the
First Restated Agreement in all respects. The Existing Security Holders
executing a counterpart signature page to this Second Restated Agreement have
the requisite power and authority to amend and restate the First Restated
Agreement pursuant to authority granted in Section 13(b) thereof. Each other
Existing Security Holder is bound by the amendment and restatement of the First
Restated Agreement and the terms of this Second Restated Agreement.

13. Miscellaneous.

(a) Remedies. If the Company shall breach its obligations to
register the Registrable Securities pursuant to this Restated Agreement, the
Holders shall be entitled to exercise all rights provided herein or granted by
law, including recovery of damages, or in equity, including specific
performance.

(b) Amendments and Waivers. This Restated Agreement may be
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company shall
have obtained the written consent to such amendment, action or omission to act,
of the Holder or Holders of at least 66-2/3% of the Registrable Securities then
held by all Holders (the "Amendment Percentage"); provided, however, for
purposes of calculating the Amendment Percentage, there shall be excluded from
the definition of Registrable Securities all iMark Merger Shares and all Lock-Up
Shares, and the iMark Merger Shares and Lock-Up Shares shall not be voted for
any amendment, action or omission to act for any purpose under this Section
13(b). Notwithstanding the foregoing, except upon the consent in writing of a
majority-in-interest of iMark Merger Shares and Lock-Up Shares, no amendment or
waiver shall be binding on any holder of iMark Merger Shares or Lock-Up Shares,
if such amendment or waiver would materially adversely affect the rights of such
holders as holders of Registrable Securities; provided, however, the granting of
registration rights on a parity with the iMark Merger Shares shall not be deemed
to affect the rights of holders of iMark Merger Shares and Lock-Up Shares
materially and adversely. Each Holder of any Registrable Securities at the time
and any subsequent Holder of Registrable Securities shall be bound by any
consent authorized by this subsection 13(b), whether or not such Registrable
Securities shall have been marked to indicate such consent.

(c) Notices. All notices and other communications provided for
or permitted hereunder shall be in writing and shall be deemed to have been duly
delivered (a) when delivered by hand, if personally delivered, (b) if sent by
mail to a party whose address is in the same country as the sender, two Business
Days after being deposited in the mail, postage prepaid, (c) when delivered by
courier as evidenced by receipt from the courier, if delivered by courier, or
(d) if sent by facsimile transmission on a Business Day, upon confirmation of
receipt; provided, however, that if the Company is required to give notice, or
to furnish information or prospectus(es) to holders of iMark Merger Shares
pursuant to the terms of this Second Restated

<PAGE> 12

Agreement, the Company may, at its option, elect to satisfy any such requirement
by giving notice, or furnishing such information or prospectus(es) to the
Representative (as defined in the iMark Merger Agreement). All notices provided
by the Company hereunder shall be given to the Security Holders at their
respective addresses appearing in the books and records of the Company.

(d) Assignments and Transfers. Each Holder of Registrable
Securities may make an assignment or transfer to any transferee or assignee of
any Registrable Securities, provided, that (i) such transfer is made expressly
subject to this Restated Agreement and the transferee agrees in writing to be
bound by the terms and conditions hereof, and (ii) the Company is provided with
reasonably prompt written notice of such assignment.

(e) Benefits of the Agreement. The terms and conditions of
this Restated Agreement shall inure to the benefit of and be binding upon the
respective permitted successors and assigns of the parties.

(f) Severability. If one or more provisions of this Restated
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Restated Agreement and the balance of this Restated
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.

(g) Entire Agreement. This Second Restated Agreement is
intended by the parties as a final expression of their agreement and intended to
be a complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. This Second
Restated Agreement supersedes all prior agreements and understandings between
the parties with respect to such subject matter.

(h) Applicable Law. This Restated Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware without
regard to principles of conflicts of law.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE> 13

IN WITNESS WHEREOF, the parties have executed this Restated
Agreement as of the date first written above.

FREEMARKETS, INC.

By: /s/ GLEN T. MEAKEM
------------------------------
Glen T. Meakem
President

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE> 14

SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT

SECURITY HOLDER

------------------------------
Printed Name

------------------------------
Signature

------------------------------
Date

<PAGE> 15

Additional Signature Pages of the Following Parties Omitted

Goldman Sachs Group, Inc.
Stone Street Fund 1999, L.P.
Nevada Bond Investment Corp. II
Saturn Capital, Inc.
Glen T. Meakem
Sam E. Kinney, Jr.
Nelia Araujo
Austin Ventures VI Affiliates Fund, L.P.
Austin Ventures VI, L.P.
Ricardo Castaneda
Robert Chiste
Comdisco
CNA Trust Corporation TTEE for The Venture Law Group
401(k) Retirement Savings Plan FBO: Mitchell S. Zuklie
CNA Trust Corporation TTEE for Venture Law Group
401(k) FBO Glen R. Van Ligten
J. Ross Cockrell
Curly H Ventures, LTD.
Michael Dickson
Sophia Dilberakis
Bosko Durickovic
Fariseu Investmentos E Servicos, LDA.
Issam Faza
Sharon Hendricks
Douglas G. Hibberd
Gregory J. Ikonen
Impact Venture Partners
Paul Jendrzey
Steven Kaplan
Donald M. Keller, Jr.
Robert E. Kornblum
Kirk Lockhart
Brian Magierski
Richard Merritt
Dave Milam
Elizabeth Moline
Paul Ohls
Scott Patterson
Glenn Rau
Robert Sanchez
Mark Saul
Marc Schriftman
Techxas Fund v 1.0, L.P.
Jeff Thomas
VLG Investments 1999
Rob Volkel
Mel Williams
Mark Winfeld Hansen
Mitchel Zuklie

<PAGE> 16

SCHEDULE A
EXISTING SECURITY HOLDERS

American Express Travel Related Services Co.
ATGF II
Raymond C. and Mary Jo Becker
Birchmere Investments
Francis M. Bricmont
Barry B. and Sheila A. Bridger
Ralph H. Cechettini 1995 Trust
Ralph H. Cechettini IRA Rollover
Daniel F. Chapey
Anthony Ciulla
CSM Partners
Robert B. and Ann M. Eagan
James M. Edwards
Jack W. Elliott
Matthew O. Fitzmaurice
Stephen J. Getsy
Goldman Sachs Group, Inc.
Sam E. Kinney, Jr.
Keith B. and Jane M. Kirkland
Robert Kopf
Thomas Kopf
John P. Levis, III
Christopher Lord
Glen T. Meakem
Douglas T. and Deborah L. Millar
Nevada Bond Investment Corp. II
Hugh W. Nevin, Jr.
David A. Noble
Pivotal Application Fund
Pivotal Partners, LP
Saturn Capital, Inc.
Sean Sebastian
William S. Slattery
James Stableford
Stone Street Fund 1999, L.P.
Vertex Capital II, LLC
Marc Weiss

<PAGE> 17

SCHEDULE B
NEW SECURITY HOLDERS

Nelia Araujo
Ricardo Castaneda
Michael Dickson
Bosko Durickovic
Douglas G. Hibberd
Paul Jendrzey
Gregory J. Ikonen
Donald M. Keller, Jr.
Robert E. Kornblum
Kirk Lockhart
Brian Magierski
Richard Merritt
Dave Milam
Elizabeth Moline
Paul Ohls
Scott Patterson
Glenn Rau
Robert Sanchez
Marc Schriftman
Rob Volkel
Mel Williams
Austin Ventures VI Affiliates Fund, L.P.
Austin Ventures VI, L.P.
Robert Chiste
Comdisco
CNA Trust Corporation TTEE for The Venture Law Group
401(k) Retirement Savings Plan FBO: Mitchell S. Zuklie
CNA Trust Corporation TTEE for Venture Law Group
401(k) FBO Glen R. Van Ligten
J. Ross Cockrell
Curly H Ventures, LTD.
Sophia Dilberakis
Fariseu Investmentos E Servicos, LDA.
Issam Faza
Sharon Hendricks
Steven Kaplan
Donald M. Keller, Jr.
Robert E. Kornblum
Glenn Rau
Robert Sanchez
Mark Saul
Techxas Fund v1.0, L.P.
Glen R. Van Ligten
VLG Investments 1999
Mark Windfeld-Handsen
Mitchell S. Zuklie
Impact Venture Partners

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