##### Table of Contents

---

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, 2004



OR



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



For the transition period from  to



Commission File Number: 000-30436



---



SCIQUEST, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 56-2127592                          
|(State or other Jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|5151 McCrimmon Parkway, Suite 216 Morrisville, North Carolina  |  | 27560                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(919) 659-2100

(Registrants telephone number, including area code)



---



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  xNo ̈



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



As of May 6, 2004, 3,769,557 shares of Common Stock, $.001 par value, were outstanding.



---



---

##### Table of Contents

SCIQUEST, INC.



TABLE OF CONTENTS



|                                                                                                     |  |   
|---------------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION:                                                                      |  |   
|                                                                                                     | 
|ITEM 1: FINANCIAL STATEMENTS                                                                         |  |   
|                                                                                                     | 
|Consolidated Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003                      |  | 3 
|                                                                                                     | 
|Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003 (unaudited) |  | 4 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (unaudited) |  | 5 
|                                                                                                     | 
|Notes to Consolidated Financial Statements (unaudited)                                               |  | 6 
|                                                                                                     | 
|ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS        |  | 17
|                                                                                                     | 
|ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                   |  | 32
|                                                                                                     | 
|PART II  OTHER INFORMATION:                                                                         |  |   
|                                                                                                     | 
|ITEM 1: LEGAL PROCEEDINGS                                                                            |  | 33
|                                                                                                     | 
|ITEM 2: CHANGES IN SECURITIES                                                                        |  | 33
|                                                                                                     | 
|ITEM 3: DEFAULTS IN SECURITIES                                                                       |  | 33
|                                                                                                     | 
|ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                          |  | 33
|                                                                                                     | 
|ITEM 5: OTHER INFORMATION                                                                            |  | 33
|                                                                                                     | 
|ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                             |  | 34
|                                                                                                     | 
|SIGNATURES                                                                                           |  | 36
|                                                                                                     | 
|CERTIFICATIONS                                                                                       |  |   



2



---

##### Table of Contents

PART I



Item 1.Financial Statements



SciQuest, Inc.



CONSOLIDATED
BALANCE SHEETS



|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                             |  | March 31, 2004 |              |   | December 31, 2003 |  
|                                                                                                                                                             |  | (unaudited)    |              |   |                   |  
|Assets                                                                                                                                                       |  |                |              |   |                   |   |              |  
|Current assets:                                                                                                                                              |  |                |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                    |  | $              | 9,536,919    |   |                   | $ | 13,128,169   |  
|Short-term investments                                                                                                                                       |  |                | 3,247,228    |   |                   |   | 2,257,784    |  
|Accounts receivable, net                                                                                                                                     |  |                | 1,002,246    |   |                   |   | 1,172,263    |  
|Prepaid expenses and other current assets                                                                                                                    |  |                | 2,011,539    |   |                   |   | 2,907,267    |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Total current assets                                                                                                                                         |  |                | 15,797,932   |   |                   |   | 19,465,483   |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Long-term investments                                                                                                                                        |  |                | 3,889,000    |   |                   |   | 3,889,000    |  
|Property and equipment, net                                                                                                                                  |  |                | 1,238,108    |   |                   |   | 1,403,496    |  
|Capitalized software and web site development costs, net                                                                                                     |  |                | 5,613,817    |   |                   |   | 5,940,667    |  
|Other intangible assets, net                                                                                                                                 |  |                | 164,558      |   |                   |   | 182,843      |  
|Other long-term assets                                                                                                                                       |  |                | 1,195,600    |   |                   |   | 999,953      |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Total assets                                                                                                                                                 |  | $              | 27,899,015   |   |                   | $ | 31,881,442   |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Liabilities and Stockholders Equity                                                                                                                         |  |                |              |   |                   |   |              |  
|Current liabilities:                                                                                                                                         |  |                |              |   |                   |   |              |  
|Accounts payable                                                                                                                                             |  | $              | 564,461      |   |                   | $ | 552,621      |  
|Accrued liabilities                                                                                                                                          |  |                | 4,491,122    |   |                   |   | 5,624,956    |  
|Deferred revenue                                                                                                                                             |  |                | 3,980,716    |   |                   |   | 3,765,603    |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Total current liabilities                                                                                                                                    |  |                | 9,036,299    |   |                   |   | 9,943,180    |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Long-term debt                                                                                                                                               |  |                | 2,312,833    |   |                   |   | 2,312,833    |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Commitments and contingencies                                                                                                                                |  |                |              |   |                   |   |              |  
|Stockholders equity:                                                                                                                                        |  |                |              |   |                   |   |              |  
|Common stock, $0.001 par value; 90,000,000 shares authorized; 4,001,063 and 4,000,730 shares issued as of March 31, 2004 and December 31,
2003, respectively |  |                | 4,001        |   |                   |   | 4,001        |  
|Additional paid-in capital                                                                                                                                   |  |                | 314,079,519  |   |                   |   | 314,076,696  |  
|Treasury stock, at cost; 253,911 shares as of March 31, 2004 and December 31, 2003                                                                           |  |                | (1,258,948   | ) |                   |   | (1,258,948   | )
|Accumulated deficit                                                                                                                                          |  |                | (296,274,689 | ) |                   |   | (293,196,320 | )
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Total stockholders equity                                                                                                                                   |  |                | 16,549,883   |   |                   |   | 19,625,429   |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Total liabilities and stockholders equity                                                                                                                   |  | $              | 27,899,015   |   |                   | $ | 31,881,442   |  
|                                                                                                                                                             |  |                |              |   |                   |   |              |  



The accompanying notes
are an integral part of these financial statements.



3



---

##### Table of Contents

SciQuest, Inc.



CONSOLIDATED
STATEMENTS OF OPERATIONS

(unaudited)



|                                                                             |  |                              |            |   |      |   |            |  
|---------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                             |  | Three Months Ended March 31, |           
|                                                                             |  | 2004                         |            |   | 2003 |  
|Revenues:                                                                    |  |                              |            |   |      |   |            |  
|License fees and other professional services                                 |  | $                            | 1,854,481  |   |      | $ | 1,688,118  |  
|                                                                             |  |                              |            |   |      |   |            |  
|Cost of revenues:                                                            |  |                              |            |   |      |   |            |  
|Cost of license fees and other professional services                         |  |                              | 435,126    |   |      |   | 705,233    |  
|Cost of license fees-amortization of acquired and capitalized software costs |  |                              | 551,239    |   |      |   | 1,137,911  |  
|                                                                             |  |                              |            |   |      |   |            |  
|Total cost of revenues                                                       |  |                              | 986,365    |   |      |   | 1,843,144  |  
|                                                                             |  |                              |            |   |      |   |            |  
|Gross profit (loss)                                                          |  |                              | 868,116    |   |      |   | (155,026   | )
|                                                                             |  |                              |            |   |      |   |            |  
|Operating expenses:                                                          |  |                              |            |   |      |   |            |  
|Development                                                                  |  |                              | 1,664,786  |   |      |   | 1,287,971  |  
|Non-cash stock-based employee compensation                                   |  |                              |           |   |      |   | 62,377     |  
|                                                                             |  |                              |            |   |      |   |            |  
|Total development expenses                                                   |  |                              | 1,664,786  |   |      |   | 1,350,348  |  
|                                                                             |  |                              |            |   |      |   |            |  
|Sales and marketing                                                          |  |                              | 1,229,340  |   |      |   | 1,250,190  |  
|Non-cash stock-based employee compensation and customer acquisition expense  |  |                              | 1,575      |   |      |   | 2,548      |  
|                                                                             |  |                              |            |   |      |   |            |  
|Total sales and marketing expenses                                           |  |                              | 1,230,915  |   |      |   | 1,252,738  |  
|                                                                             |  |                              |            |   |      |   |            |  
|General and administrative                                                   |  |                              | 1,488,815  |   |      |   | 2,334,362  |  
|Non-cash stock-based employee compensation and amortization of intangibles   |  |                              | 18,285     |   |      |   | 30,310     |  
|                                                                             |  |                              |            |   |      |   |            |  
|Total general and administrative expenses                                    |  |                              | 1,507,100  |   |      |   | 2,364,672  |  
|                                                                             |  |                              |            |   |      |   |            |  
|Restructuring                                                                |  |                              |           |   |      |   | 380,000    |  
|                                                                             |  |                              |            |   |      |   |            |  
|Total operating expenses                                                     |  |                              | 4,402,801  |   |      |   | 5,347,758  |  
|                                                                             |  |                              |            |   |      |   |            |  
|Operating loss                                                               |  |                              | (3,534,685 | ) |      |   | (5,502,784 | )
|                                                                             |  |                              |            |   |      |   |            |  
|Other income (expense):                                                      |  |                              |            |   |      |   |            |  
|Interest income                                                              |  |                              | 99,579     |   |      |   | 161,940    |  
|Interest expense                                                             |  |                              | (23,552    | ) |      |   | (20,137    | )
|Other income, net                                                            |  |                              | 380,289    |   |      |   | 463        |  
|                                                                             |  |                              |            |   |      |   |            |  
|Total other income, net                                                      |  |                              | 456,316    |   |      |   | 142,266    |  
|                                                                             |  |                              |            |   |      |   |            |  
|Loss from continuing operations                                              |  |                              | (3,078,369 | ) |      |   | (5,360,518 | )
|Loss from discontinued operations                                            |  |                              |           |   |      |   | (89,824    | )
|                                                                             |  |                              |            |   |      |   |            |  
|Net loss                                                                     |  | $                            | (3,078,369 | ) |      | $ | (5,450,342 | )
|                                                                             |  |                              |            |   |      |   |            |  
|Net loss per common sharebasic and diluted:                                 |  |                              |            |   |      |   |            |  
|From continuing operations                                                   |  | $                            | (0.82      | ) |      | $ | (1.37      | )
|Loss from discontinued operations                                            |  |                              |           |   |      |   | (0.02      | )
|                                                                             |  |                              |            |   |      |   |            |  
|Net loss per share-basic and diluted                                         |  | $                            | (0.82      | ) |      | $ | (1.39      | )
|                                                                             |  |                              |            |   |      |   |            |  
|Weighted average common shares outstandingbasic and diluted                 |  |                              | 3,747,031  |   |      |   | 3,922,360  |  
|                                                                             |  |                              |            |   |      |   |            |  



The accompanying notes
are an integral part of these financial statements.



4



---

##### Table of Contents

SciQuest, Inc.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                            |  |                              |            |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                            |  | Three Months Ended March 31, |           
|                                                                            |  | 2004                         |            |   | 2003 |  
|Cash flows from operating activities                                        |  |                              |            |   |      |   |            |  
|Net loss                                                                    |  | $                            | (3,078,369 | ) |      | $ | (5,450,342 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |            |   |      |   |            |  
|Depreciation and amortization                                               |  |                              | 912,506    |   |      |   | 1,996,009  |  
|Bad debt expense (benefit)                                                  |  |                              | (125,000   | ) |      |   | 50,000     |  
|Amortization of deferred compensation                                       |  |                              |           |   |      |   | 72,047     |  
|Amortization of deferred customer acquisition costs                         |  |                              | 1,575      |   |      |   | 4,903      |  
|Amortization of discount on investments                                     |  |                              | 10,556     |   |      |   | 49,872     |  
|Gain from disposal of fixed assets                                          |  |                              | (505       | ) |      |   | (400       | )
|Asset write downs and other charges of restructuring                        |  |                              |           |   |      |   | 380,000    |  
|Changes in operating assets and liabilities:                                |  |                              |            |   |      |   |            |  
|Accounts receivable                                                         |  |                              | 295,017    |   |      |   | 783,277    |  
|Prepaid expenses and other current assets                                   |  |                              | 895,728    |   |      |   | 770,117    |  
|Other assets                                                                |  |                              | (195,647   | ) |      |   | (184,818   | )
|Accounts payable                                                            |  |                              | 11,840     |   |      |   | 64,659     |  
|Accrued liabilities                                                         |  |                              | (1,133,834 | ) |      |   | (769,317   | )
|Deferred revenue                                                            |  |                              | 215,113    |   |      |   | (370,271   | )
|                                                                            |  |                              |            |   |      |   |            |  
|Net cash used in operating activities                                       |  |                              | (2,191,020 | ) |      |   | (2,604,264 | )
|                                                                            |  |                              |            |   |      |   |            |  
|Cash flows from investing activities                                        |  |                              |            |   |      |   |            |  
|Purchase of property and equipment and capitalized software                 |  |                              | (401,983   | ) |      |   | (801,149   | )
|Proceeds from sale of equipment                                             |  |                              | 505        |   |      |   | 400        |  
|Maturity of investments                                                     |  |                              |           |   |      |   | 14,350,000 |  
|Purchase of investments, including restricted cash                          |  |                              | (1,000,000 | ) |      |   | (4,110,920 | )
|                                                                            |  |                              |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                         |  |                              | (1,401,478 | ) |      |   | 9,438,331  |  
|                                                                            |  |                              |            |   |      |   |            |  
|Cash flows from financing activities                                        |  |                              |            |   |      |   |            |  
|Repayment of capital lease obligations                                      |  |                              |           |   |      |   | (44,721    | )
|Proceeds from exercise of common stock warrants and options                 |  |                              | 1,248      |   |      |   | 369        |  
|Purchase of treasury stock                                                  |  |                              |           |   |      |   | (465,714   | )
|                                                                            |  |                              |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                         |  |                              | 1,248      |   |      |   | (510,066   | )
|                                                                            |  |                              |            |   |      |   |            |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                              |           |   |      |   | (5,874     | )
|                                                                            |  |                              |            |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                        |  |                              | (3,591,250 | ) |      |   | 6,318,127  |  
|Cash and cash equivalents at beginning of period                            |  |                              | 13,128,169 |   |      |   | 11,460,153 |  
|                                                                            |  |                              |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                  |  | $                            | 9,536,919  |   |      | $ | 17,778,280 |  
|                                                                            |  |                              |            |   |      |   |            |  



The accompanying notes
are an integral part of these financial statements.



5



---

##### Table of Contents

SciQuest, Inc.



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



1. The Company



Nature of Operations



SciQuest, Inc. (SciQuest or the Company), which began operations in 1995, provides on-demand
supplier relationship management solutions that integrate organizations with their suppliers to enable comprehensive spend management. Spend management is the ability to view and analyze all spending across an enterprise, thereby providing greater
insight into purchasing functions and giving an organization control and visibility to allow it to manage spending more effectively. SciQuests suite of modular applications helps companies to automate the spend management process. These
solutions facilitate a companys purchasing functions by reducing redundant tasks throughout the cycle of finding, acquiring and managing goods, which can result in increased efficiency, reduced cost and increased insight into an
organizations buying patterns. SciQuest targets the life sciences and higher education markets.



SciQuest generates revenues by charging license, subscription and maintenance fees for the use of its technology. SciQuest also offers professional
services related to these solutions, for activities such as project implementation and training. In addition, SciQuest receives revenue from scientific supply manufacturers for converting their product catalogs into an electronic format, enhancing
or enriching the data and distributing the information as directed by the suppliers. In addition, SciQuest has historically earned revenue for advertising on its web sites and advertising in the printed catalogue of scientific products (the
Source Book). Source Book revenue has primarily been recognized in the second quarter of each fiscal year. During 2003, the Company divested its investment in the net assets related to BioSupplyNet (including the Source Book), Groton
NeoChem and Textco, Inc. As a result, the Company does not anticipate earning significant future revenue from advertising related to web sites or printed catalogues.



Liquidity



The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates
the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company had an accumulated deficit of $296 million at March 31, 2004, and during the quarter then ended used cash in operating
activities of $2.2 million and incurred a net loss of $3.1 million. The Company expects to continue generating losses through at least 2004.



The Company has funded its operations primarily through private placements of preferred stock during 1998 and 1999 and its 1999 initial public offering.
As of March 31, 2004, the Company had total cash and investments of $16.7 million, which is comprised of cash and cash equivalents of $9.5 million, short-term investments of $3.3 million and long-term investments of $3.9 million.



During 2001, the Company restructured its operations and transitioned from an
e-commerce transaction company to a software and related services provider. As a result, there is only limited operating history under the current business model with which to estimate future performance. The Companys cash flow is dependent on
its ability to control expenses and achieve revenue growth which is dependent on the Companys ability to sell software licenses and related services as well as acquire or develop new products and service offerings. Additionally, 16% of the
Companys revenue for the three months ended March 31, 2004 was generated by one customer, and the Company expects that large individual transactions with major customers may continue to represent a large percentage of revenues.



There are significant uncertainties, based on recent economic conditions and
the Companys limited operating experience as a software and related services provider, as to whether debt or equity financing will be available if the Company is required to seek additional funds. If the Company is able to secure funds in the
debt or equity markets, it may not be able to do so on terms that are favorable or acceptable to the Company. Additional equity financing would likely result in substantial dilution to existing stockholders. If the Company is unable to raise
additional capital to continue to support operations, it may be required to scale back, delay or discontinue one or more product offerings, which could have a material adverse effect on the Companys business. Reduction or discontinuation of
any one of the Companys business components or product offerings could result in additional charges, which would be reflected in the period of the reduction or discontinuation.



6



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Based on the average quarterly cash outlay for operating expenses incurred in the eleven quarters
after the June 2001 restructuring and budgeted expenditures for 2004, the Company believes cash and investments at March 31, 2004 will be sufficient to satisfy requirements for more than the next twelve months. However, lower than expected cash
flows as a result of lower revenues or increased expenses could require the Company to raise additional capital in order to maintain its operations.



2. Summary of Significant Accounting Policies



Unaudited Interim Financial Information



The unaudited interim consolidated financial statements as of and for the three months ended March 31, 2004 and 2003 have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) for interim financial reporting. These consolidated financial statements are unaudited and, in the opinion of management, include all adjustments
necessary to present fairly the consolidated balance sheets, statements of operations and statements of cash flows for the periods presented in accordance with generally accepted accounting principles. The consolidated balance sheet at December 31,
2003 has been derived from the audited consolidated financial statements at that date. Certain information and footnote disclosures have been omitted in accordance with the rules and regulations of the SEC. These interim consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Companys Form 10-K, filed with the SEC on March 25, 2004. The results of operations for
the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.



Principles of Consolidation



As of December 31, 2003, the Company reorganized its
corporate structure and merged HigherMarkets Inc. (HigherMarkets) with SciQuest, Inc. As of March 31, 2004, the financial statements include the accounts of SciQuest, Inc. without any subsidiaries. Prior to the reorganization, the
consolidated financial statements include the accounts of SciQuest, Inc. and its wholly-owned subsidiary, HigherMarkets, Inc. All significant intercompany accounts and transactions have been eliminated. During the second quarter of 2003, the Company
reorganized its corporate structure dissolving SciQuest Europe, Limited, and sold Textco, Inc., a wholly-owned subsidiary. Prior to the reorganization and sale, the consolidated financial statements include the accounts of SciQuest, Inc. and its
wholly-owned subsidiaries, SciQuest Europe, Limited (formerly EMAX Solution Partners (UK) Limited), Textco, Inc. (Textco) and HigherMarkets, Inc. All significant intercompany accounts and transactions have been eliminated.



Cash and Cash Equivalents



The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.



Investments



The Company considers all investments that are not
considered cash equivalents and with a maturity of less than one year from the balance sheet date to be short-term investments. The Company considers all investments with a maturity of greater than one year to be long-term investments. All
investments are considered as held-to-maturity and are carried at amortized cost, as the Company has both the positive intent and ability to hold them to maturity. Interest income includes interest, amortization of investment purchase premiums and
discounts, and realized gains and losses on sales of securities. Realized gains and losses on sales of investment securities are determined based on the specific identification method.



7



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Restricted Cash



At March 31, 2004, restricted cash of $500,000, $245,000 and $3,889,000 included in cash and cash equivalents, short-term investments and long-term
investments, respectively, is comprised of certificates of deposit, money market and other investment accounts which serve as collateral for the Companys lease commitments, officer and founder loans guaranteed by the Company and long-term
debt.



Accounts Receivable



The Company bears all risk of loss on credit sales. Accounts receivable are
presented net of an allowance for doubtful accounts of approximately $47,000 and $152,000 at March 31, 2004 and December 31, 2003, respectively.



Property and Equipment



Property and equipment is primarily comprised of furniture and computer equipment which are recorded at cost and depreciated using the straight-line
method over their estimated useful lives which are usually seven years for furniture and three to five years for computer software and equipment. Property and equipment includes certain equipment under capital leases. These items are depreciated
over the shorter of the lease period or the estimated useful life of the equipment.



Expenses for repairs and maintenance are charged to operations as incurred. Upon retirement or sale, the cost of the disposed assets and the related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is credited or charged to operations.



Development
Costs



Development costs include expenses incurred by the
Company to develop, enhance, manage, monitor and operate the Companys hosted software solutions, to manage and integrate data related to these solutions and to develop software to be licensed. The Company accounts for the software development
component of internal use software development costs in accordance with Statement of Position No. 98-1 which requires certain costs associated with the development of the Companys hosted solutions and internal applications to be capitalized
and amortized to development expense over the useful life of the related applications. Capitalized development costs are amortized over the estimated life of the related application, which generally range from three months to two years.



Capitalized Software Costs



Software development costs related to software products sold to
customers are required to be capitalized beginning when a products technological feasibility has been established and ending when a product is available for general release to customers. Capitalized software costs resulted from the
acquisitions of EMAX, Textco, Groton NeoChem and HigherMarkets as determined by valuations prepared by management and from developing standardized versions of software products for sale. Capitalized software costs are amortized over the period of
expected benefit, which is typically two to four years, at a rate based on the higher of the straight-line or expected revenue methods.



Intangible Assets



Intangible assets consist of goodwill and certain other intangible assets acquired in the Companys various acquisitions. Goodwill is recorded as an
asset and tested for impairment annually on December 31. Prior to 2002, goodwill was amortized over a period of three to five years. All other intangible assets are amortized over the period the Company expects to benefit from their use, typically a
period of two to three years.



The Company evaluates the
recoverability of goodwill and other intangible assets according to the applicable accounting standards in order to determine whether impairments have occurred. For goodwill, an impairment is recognized whenever the carrying value of the goodwill
and its related assets exceeds fair value, which is normally measured as the sum of the estimated future discounted cash flows attributable to the business component to which the asset relates.



8



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Fair Value of Financial Instruments



The carrying values of cash and cash equivalents, accounts payable and accounts receivable at March 31, 2004 and December
31, 2003 approximated their fair values due to the short-term nature of these items. The Company considers its short-term and long-term investments to be held-to-maturity, and therefore these investments are carried at amortized cost.



Impairment of Long-Lived Assets



The Company evaluates the recoverability of its property and equipment and
intangible assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 requires long-lived assets to be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized in the event that the net book value of an asset exceeds the future undiscounted cash flows
attributable to such asset or the business to which such asset relates and the net book value exceeds fair value. The impairment amount is measured as the amount by which the carrying amount of a long-lived asset (or asset group) exceeds its fair
value.



The Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and other Intangible Assets (SFAS No. 142) effective January 1, 2002. This statement addresses accounting and reporting for acquired goodwill and intangible assets.



Revenue Recognition



SciQuest generates revenues by charging license, subscription and maintenance fees for the use of its technology. SciQuest
also offers professional services related to these solutions, for activities such as project implementation and training. In addition, SciQuest receives revenue from scientific supply manufacturers for converting their product catalogs into an
electronic format, enhancing or enriching the data and distributing the information as directed by the suppliers.



The Company sells subscriptions to its hosted e-procurement and materials management solutions. The implementation services and the total subscription
fees are recognized ratably over the term of the agreement. Revenues from the sale of software licenses and custom development and implementation services under fixed-fee contracts are recognized using the percentage-of-completion method over the
term of the development and implementation services. Revenues from the sale of standardized versions of software are recognized upon customer acceptance in accordance with Statement of Position 97-2, Software Revenue Recognition.
Revenues from implementation services are recognized concurrently with the effort and costs incurred by the Company, at billable rates specified in the terms of the contract. Losses expected to be incurred on custom development and implementation
services contracts in process, for which the fee is fixed, are charged to income in the period in which the estimated losses are initially identified. The Company sells maintenance contracts to provide updates and standard enhancements to its
software products. Maintenance fee revenue is recognized ratably over the term of the arrangements, generally one year.



The Company also generates revenues by charging scientific supply manufacturers for data conversion and maintenance services. The related revenues for
supplier data conversion and maintenance services are recognized ratably over the period of the agreements.



Advertising revenues are recognized ratably over the period in which the advertisement is displayed, provided that the Company has no significant
remaining obligations to the advertiser and that collection of the resulting receivable is probable. Revenues from advertising included in the Source Book are recognized at the date the Source Book is published and distributed to the purchasers of
scientific products as the Company has met all of its obligations to the advertisers at that date. Source Book revenue is included in license fees and other professional services and has historically been recognized in the second quarter of each
fiscal year.



9



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Cost of Revenues



The cost of software licensing, implementation and maintenance revenues consists primarily of personnel costs for employees who work directly on the
development and implementation of customized electronic research solutions and who provide maintenance to customers, and also consists of the amortization of capitalized software development costs. The cost of revenue for subscriptions to
e-procurement and materials management solutions and for the related implementation services is recognized ratably over the term of the agreement. Cost of advertising revenue includes the cost of preparing the advertisements for display on the
Companys web sites and the cost of publishing and distributing the Source Book. Advertising production costs are recorded as cost of revenues the first time an advertisement appears on the Companys web sites.



Sales and Marketing Expenses



Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process. Sales and marketing expenses also include costs of advertising, trade shows and certain indirect costs and amortization of deferred customer acquisition costs. All costs of
advertising the services and products offered by the Company are expensed as incurred.



Deferred Customer Acquisition Costs



Deferred
customer acquisition costs relate to common stock warrants given in 1999 to several key suppliers and buyers of scientific products. The amount of deferred customer acquisition costs is and will be adjusted in each reporting period based on changes
in the fair value of the underlying common stock until such date as the warrants are fully vested and non-forfeitable or cancelled. Deferred customer acquisition costs will be amortized as a non-cash charge to sales and marketing expense over the
term of the related contractual relationship using a cumulative catch-up method. The terms of the contractual relationships range from three to five years (see Note 4). Deferred customer acquisition costs are presented net of accumulated
amortization.



Income Taxes



The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary differences between financial reporting and tax bases of the Companys assets and liabilities and for tax carryforwards at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse.



The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.



Stock Based Compensation



The Company accounts for non-cash stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations, which states that no compensation expense is recognized for stock options or other stock-based
awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Companys common stock on the grant date. In the event that stock options are granted with an exercise price below the
estimated fair market value of the Companys common stock at the grant date, the difference between the fair market value of the Companys common stock and the exercise price of the stock option is recorded as deferred compensation.
Deferred compensation is amortized to compensation expense over the vesting period of the related stock option.



The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement No. 123 which
requires certain pro forma disclosures as if compensation expense was determined based on the fair value of the options granted at the date of the grant.



10



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Had compensation expense for the plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the methods of SFAS No. 123, the Companys net loss for the three months ended March 31, 2004 and 2003 would have been increased to the pro forma amounts indicated below:



|                                                                                                                                            |  |                              |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                            |  | Three Months Ended March 31, |           
|                                                                                                                                            |  | 2004                         |            |   | 2003 |  
|Net loss available to common stockholders:                                                                                                  |  |                              |            |   |      |   |            |  
|As reported                                                                                                                                 |  | $                            | (3,078,369 | ) |      | $ | (5,450,342 | )
|Add: Stock-based employee compensation expense included in reported net loss, net of tax related effects                                    |  |                              |           |   |      |   | 72,047     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                              | (424,788   | ) |      |   | (1,035,025 | )
|                                                                                                                                            |  |                              |            |   |      |   |            |  
|SFAS 123 proforma                                                                                                                           |  | $                            | (3,503,157 | ) |      | $ | (6,413,320 | )
|                                                                                                                                            |  |                              |            |   |      |   |            |  
|Loss per sharebasic and diluted:                                                                                                           |  |                              |            |   |      |   |            |  
|As reported                                                                                                                                 |  | $                            | (0.82      | ) |      | $ | (1.39      | )
|                                                                                                                                            |  |                              |            |   |      |   |            |  
|SFAS 123 proforma                                                                                                                           |  | $                            | (0.93      | ) |      | $ | (1.64      | )
|                                                                                                                                            |  |                              |            |   |      |   |            |  



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the three months ended March 31, 2004 and 2003: risk free interest of 3.0% and 2.9%
respectively; expected lives of five years; dividend yields of 0%; and volatility factors of 114% and 125%, respectively.



Credit Risk, Significant Customers and Concentrations



Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, accounts receivable and
investments. Cash and cash equivalents are deposited with high credit quality financial institutions which invest primarily in U.S. Government securities, highly rated commercial paper and certificates of deposit guaranteed by banks which are
members of the FDIC. The counterparties to the agreements relating to the Companys investments consist primarily of the U.S. Government and various major corporations with high credit standings.



During the three months ended March 31, 2004, one customer comprised 16% of
the Companys revenue. Although substantially all of the Companys revenues are from sales transactions originating in the United States, generating revenue from large sales and installations of software increases short-term concentrations
of credit risk with respect to accounts receivable. This credit risk is typically limited due to the contractual structure and short-term nature of each engagement and because most customers are located in the United States. At March 31, 2004, two
customers comprised 25% and 16%, respectively, of the gross accounts receivable balance.



Comprehensive Income (Loss)



The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Comprehensive income, as defined, includes all changes in equity during a period from non-owner
sources. The Companys only item of other comprehensive income was foreign currency translation during the three months ended March 31, 2003.



Segment Reporting



The Company has determined that it has one reportable operating segment, license fees and other professional services, as defined by Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 uses a management approach and designates the internal organization used by management
for making operating decisions and assessing performance as the source of the Companys reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers.



11



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Net Income (Loss) Per Common Share



Basic net income (loss) per common share (Basic EPS) is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per common share (Diluted EPS) is computed by dividing net income (loss) available to common stockholders by the weighted average
number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. The calculation of the net loss per share available to
common stockholders for the three months ended March 31, 2004 and 2003 does not include any potential shares of common stock equivalents, as their impact would be anti-dilutive.



In September 2001, the Board of Directors authorized a stock repurchase program. The program authorizes the Company to
purchase up to $5 million of common stock over the next twelve months from time to time in the open market or in privately negotiated transactions depending on market conditions. On August 28, 2002, the Companys Board of Directors extended its
prior authorization for an additional twelve months. As of March 31, 2004, the Company had purchased and placed in treasury 253,911 shares of its common stock at a cost of $1,258,948.



Reclassifications



Certain prior period amounts have been reclassified to conform with the current period presentation.



Recent Accounting Pronouncements



In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149). FASB Statements No. 133 Accounting for Derivative Instruments and Hedging
Activities and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, establish accounting and reporting standards for derivative instruments including derivatives embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No. 149 amends Statement 133 for certain decisions made by the Board as part of the Derivatives Implementation Group (DIG) process. This Statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, and FASB Statements No. 65, Accounting for Certain Mortgage Banking Activities, No. 91 Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from Certain Required Disclosures about Financial
Instruments for Certain Nonpublic Entities. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any material impact on the Companys financial
statements or results of operations.



In January 2003, the
Financial Accounting Standards Board issued Financial Accounting Series FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN No. 46). The primary objective of the
Interpretation is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities (VIEs). FIN No. 46 has
far-reaching effects and applies immediately to new entities created after January 31, 2003, as well as applies to existing entities in which an enterprise obtains an interest after that date. The provisions of FIN No. 46 are effective at the end of
the first interim or annual period ending after December 15, 2003, to variable-interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN No. 46 is the guidance that determines (1) whether
consolidation is required under the controlling financial interest model of Accounting Research Bulletin No. 51, Consolidated Financial Statements, or other existing authoritative guidance, or, alternatively, (2) whether the
variable-interest model under FIN No. 46 should be used to account for existing and new entities. The adoption of FIN No. 46 did not have any material impact on the Companys financial statements or results of operations.



In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for classification and measurement in
the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within



12



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation
of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective on July 1, 2003. The adoption of SFAS No. 150 did not have any material impact on the Companys
financial statements or results of operations.



Employee Stock Purchase Plan



During 2000, the Board of Directors reserved 146,666
shares of the Companys common stock for issuance under the Employee Stock Purchase Plan (ESPP). The ESPP has two 24-month offering periods (each an Offering Period) annually, beginning May 1 and November 1,
respectively. The first Offering Period under the ESPP ended on November 1, 2000. Eligible employees can elect to make deductions from 1% to 20% of their compensation during each payroll period of an Offering Period. Special limitations apply to
eligible employees who own 5% or more of the outstanding common stock of the Company. None of the contributions made by eligible employees to purchase the Companys common stock under the ESPP are tax deductible to the employees. Upon April 30
and October 31 (the Purchase Date) of each year, the total payroll deductions by an eligible employee for that six-month period will be used to purchase common stock of the Company at a price equal to 85% of the lesser of (a) the
reported closing price of the Companys common stock on the enrollment date of the Offering Period, or (b) the reported closing price of the common stock on the Purchase Date.



3. Restructuring



In June 2001, the Company announced a restructuring of the business to eliminate outsourced procurement services. The restructuring included the
elimination of certain unprofitable business lines and a resultant reduction in workforce of approximately one-half of the employees located in the United States. The restructuring charge included approximately $2.4 million of other costs and lease
obligations relating to the unprofitable business lines to be eliminated. This restructuring has been concluded except for the lease obligations.



Due to the additional excess occupancy costs resulting from both an increase in the amount of unutilized rental space and an increase in the estimated
number of months before receiving anticipated sublease proceeds because of the depressed local commercial real estate markets, the Company reevaluated the 2001 provision for excess office capacity and increased the charge for restructuring by $2.9
million during 2002.



During the first quarter of 2003, the
Company began refocusing resources to support its procurement product platform and reducing costs in other areas, which resulted in an elimination of approximately 50 full-time positions by the end of the second quarter of 2003. This reduction in
personnel resulted in the recognition of severance expense and additional excess office space. Also during 2003, new subleases and adjustments to previous subleases resulted in adjustments to the restructuring liability and charges to restructuring
expense.



The following table summarizes information about the
Companys restructuring plans:



|                                         |  |                                |           |                                  |   |                                              |  |                                       |         |  |   |          
|---------------------------------------- |  | ------------------------------ | --------- | -------------------------------- | - | -------------------------------------------- |  | ------------------------------------- | ------- |  | - | ---------
|                                         |  | Liability at December 31, 2003 |           | AdditionalRestructuring Expenses |   | Impairment Expenses and Charges to Liability |  | Remaining Liability at March 31, 2004
|Number of employees                      |  |                                |          |                                  |   |                                             |  |                                       |        |  |   |         
|                                         |  |                                |           |                                  |   |                                              |  |                                       |         |  |   |          
|Involuntary termination benefits         |  | $                              |          |                                  | $ |                                             |  | $                                     |        |  | $ |         
|Other costs, primarily lease obligations |  |                                | 3,254,534 |                                  |   |                                             |  |                                       | 256,635 |  |   | 2,997,899
|                                         |  |                                |           |                                  |   |                                              |  |                                       |         |  |   |          
|Total                                    |  | $                              | 3,254,534 |                                  | $ |                                             |  | $                                     | 256,635 |  | $ | 2,997,899
|                                         |  |                                |           |                                  |   |                                              |  |                                       |         |  |   |          





13



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



4. Strategic Relationships



In October, November and December 1999, the Company entered into strategic relationships with a number of key suppliers and
buyers of scientific products. As a part of these arrangements, the Company issued to these companies 546,890 warrants to purchase the Companys common stock at an exercise price of $0.075 per share of which 7,500 warrants were issued and
outstanding at March 31, 2004. During 2001 and 2002, warrants representing 486,004 shares of common stock were cancelled. These cancellations will not have any effect on net stockholders equity. Future amortization costs will be reduced by an
undetermined amount. At March 31, 2004 and December 31, 2003, the Company had deferred customer acquisition costs of $3,258,280 and $3,256,705, respectively, with accumulated amortization of $3,258,280 and $3,256,705, respectively, resulting in net
costs of $0 and $0, respectively related to these warrants. The amount of deferred customer acquisition costs will be adjusted in future reporting periods based on changes in the fair value of the warrants until such date as the warrants are fully
vested and non-forfeitable. Deferred customer acquisition costs will be amortized to operating expense over the term of the related contractual relationship, which in the case of the buyer agreements is three years and in the case of the supplier
agreements is four or five years, using a cumulative catch-up method. The Company recognized $1,575 and $6,215 in stock-based non-cash customer acquisition expense during the three months ended March 31, 2004 and 2003, respectively, related to the
amortization of deferred customer acquisition costs.



5. Legal Proceedings



SciQuest and three of its officers were named as
defendants in a lawsuit filed on September 10, 2001 in the United States District Court, Southern District of New York, captioned Patricia Figuerido v. Sciquest.com, Inc, No. 01 CV 8467. The case subsequently was consolidated for pretrial purposes
with approximately 1,000 other lawsuits filed against more than 300 other issuers, certain of their officers and directors, and the underwriters of their initial public offerings, under the caption In re Initial Public Offering Securities
Litigation, 21 MC 92 (SAS). After the cases were consolidated, plaintiffs filed a Master Complaint and 309 consolidated amended complaints related to each issuer defendants offering. The consolidated amended complaint in In re Sciquest.com,
Inc. Initial Public Offering Securities Litigation, No. 01 Civ. 7415, purports, on behalf of a putative class of purchasers of the Companys common stock from its initial public offering through December 6, 2000, to state claims under the
Securities Act of 1933 and under the Securities Exchange Act of 1934 against SciQuest and seven investment banking firms who either served as underwriters, or are the successors in interest to underwriters, of the Companys initial public
offering. Separate claims against the underwriters only also have been brought under the Securities Act and the Exchange Act. The complaint alleges that the prospectus used in the Companys initial public offering contained material
misstatements or omissions regarding the underwriters allocation practices and compensation in connection with the initial public offering and also alleges that the underwriters manipulated the aftermarket for the Companys common stock.
In October 2002, the claims against the Companys officers were dismissed without prejudice. In February 2003, the court denied SciQuests motion to dismiss the action against it. On July 1, 2003, a Special Committee of the Board acting on
behalf of the Company authorized the Company to enter into a definitive settlement agreement to be prepared under the terms outlined in a Memorandum of Understanding. The anticipated settlement will be subject to court approval following notice to
class members and a fairness hearing. Until final approval of the settlement by the court, the Company intends to continue its vigorous defense against the action that originally sought an unspecified amount of damages, together with interest, costs
and attorneys fees. It is too early in this matter to reasonably predict the probability of the outcome or to estimate a range of possible losses. Future losses may have a material adverse effect on the Companys consolidated financial
position, liquidity or consolidated results of operations.



During 2001, a customer filed an action seeking a declaratory judgment that its license entitled it to permit non-customer employees to use the Companys licensed software. In addition, the complaint alleged breach by the Company of an
agreement pursuant to which the Company was to upgrade the software to a newer version. The complaint sought damages alleged to exceed $1,000,000. The litigation arose out of the Companys discovery that the customer had permitted non-customer
employees to use the software. After attempts proved unsuccessful to amicably resolve the dispute, the Company suspended work on the upgrade and the customer failed to pay for the work performed. The Company defended the action and asserted its
counterclaims seeking damages in excess of $2,000,000 for copyright infringement and breach of contract and seeking to recover the amounts due for work previously billed, but unpaid. In March 2004, the parties, under the guidance of the magistrate,
agreed to a settlement structure of $450,000 to be paid to SciQuest with a release of all other claims. The settlement was received during March 2004 and the portion exceeding the outstanding customer balance was recorded as other income.



14



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



6. Related Party Transactions



In February 2002, the Company guaranteed an $80,000 loan for Mr. M. Scott Andrews, a member of the Board of Directors and
co-founder. The loan bears interest at prime rate and becomes payable in full in February 2004. The Company has agreed to reimburse Mr. Andrews for interest paid on this loan. The transaction was approved by a majority of the Companys
disinterested directors. Mr. Andrews repaid the entire loan in February 2004, and consequently the Company has been released from its guarantee on this loan arrangement.



The Sarbanes-Oxley Act of 2002 prohibits companies from extending credit or arranging for the extension of credit for any
director or executive officer in the form of a personal loan. Credit arrangements that were in place prior to this act may be maintained, but not renewed. The Company believes that it is fully compliant with this act and did not renew any guarantees
after the maturity of the loan referenced above.



In September
2003, the Company renewed a partial guarantee of a $440,000 real estate loan to a co-founder secured with a certificate of deposit in the amount of $245,000. The loan bears interest at prime rate and becomes payable in full in September 2004. The
transaction was approved unanimously by the Companys Board of Directors all of whom were disinterested with respect to this transaction.



7. Divestitures



Effective May 31, 2003, the Company sold all of the outstanding shares of Textco, Inc. to the original owners in exchange for all of the 65,060 shares of
SciQuest common stock originally issued in February 2002 as part of the acquisition by SciQuest and a secured interest-free promissory note in the amount of $180,000, which is due in monthly installments through May 30, 2004. The fair value of the
note using an imputed interest rate of 6.95% equals $172,484. The common stock was valued at $267,007 based on the average market price over the five-day period beginning two days before and ending two days after the sale date. The sale resulted in
a loss on disposal of $247,417, ($0.06 per share) during the second quarter of 2003.



The results of operations of the business unit are shown as discontinued operations for all periods presented. The following is the condensed financial information for the Textco business unit for the three months
ended March 30, 2003.



|                                                 |  |                                   |         |  
|------------------------------------------------ |  | --------------------------------- | ------- | -
|                                                 |  | Three Months Ended March 31, 2003 |        
|Revenue                                          |  | $                                 | 192,911 |  
|Gross profit                                     |  | $                                 | 34,227  |  
|Operating expenses                               |  | $                                 | 124,051 |  
|Income (loss) from operations                    |  | $                                 | (89,824 | )
|Loss on disposal                                 |  |                                   |        |  
|                                                 |  |                                   |         |  
|Total income (loss) from discontinued operations |  | $                                 | (89,824 | )
|                                                 |  |                                   |         |  



Effective July 2003,
the Company divested the net assets related to BioSupplyNet and recognized a gain on the transaction of $170,000.



Effective September 2003, the Company divested the net assets related to Groton NeoChem and recognized a loss of $165,000.



15



---

##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



8. Reverse Stock Split



On April 30, 2003, the shareholders authorized the Board of Directors to amend the Companys certificate of
incorporation to effect a reverse stock split at one of three ratios. Subsequently, the Board of Directors approved a reverse stock split in the ratio of one share for every seven and one-half shares outstanding. The reverse stock split was
effective as of May 20, 2003. As a result, the number of shares outstanding on May 20, 2003 was reduced from 28,966,037 to 3,862,138. The Company repurchased the related fractional shares.



All share and per share information has been adjusted to give effect to the
reverse stock split for all periods presented, including all references throughout the financial statements and accompanying notes.



9. Subsequent Event



On April 10, 2004 the Company entered into a definitive acquisition agreement to be acquired by Trinity Ventures. Under the terms of the agreement,
Trinity Ventures will acquire SciQuest in a transaction valued at $25,250,000 by means of a cash merger. The amount of cash per share of outstanding share of Sciquest common stock was estimated to be approximately $6.25, assuming the acquisition
closes on or about July 31, 2004. The actual per share cash consideration that will be received by SciQuest stockholders will be equal to $25,250,000 divided by the number of all issued and outstanding shares of common stock as of the closing of the
acquisition plus the number of shares of common stock subject to in-the-money stock options that are vested as of the closing of the acquisition. The acquisition would result in SciQuest becoming wholly-owned by Trinity Ventures. If the acquisition
is consummated, SciQuest will no longer be a public company and will no longer be listed on the NASDAQ National Market.



The closing of the merger is subject to a number of conditions, including clearance by the Securities and Exchange Commission of the form of proxy
statement to be sent to the Companys stockholders for their approval of the merger and obtaining the approval of the merger by the holders of at least a majority of the issued and outstanding shares of the Companys common stock.



16



---

##### Table of Contents

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



The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in
this report.



Some of the statements contained in this
Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report contain forward-looking information. You can identify these statements by forward-looking words such as expect,
anticipate, believe, goal, plan, intend, estimate, predict, project, potential, continue, may, will, and
should or similar words. They include statements concerning:



| |  | expansion of our product and service offerings;
| | - | -----------------------------------------------



| |  | future sources of revenues;
| | - | ---------------------------



| |  | future development expenses;
| | - | ----------------------------



| |  | future sales and marketing expenses;
| | - | ------------------------------------



| |  | future general and administrative expenses;
| | - | -------------------------------------------



| |  | future non-cash stock-based customer acquisition costs;
| | - | -------------------------------------------------------



| |  | future operating expenses;
| | - | --------------------------



| |  | future interest income;
| | - | -----------------------



| |  | future cash flows;
| | - | ------------------



| |  | future operating losses;
| | - | ------------------------



| |  | future licensing of software from third parties;
| | - | ------------------------------------------------



| |  | future effects of our contractual obligations and other off-balance sheet arrangements;
| | - | ---------------------------------------------------------------------------------------



| |  | future revenue from a limited number of large customers;
| | - | --------------------------------------------------------



| |  | the length of our sales cycle;
| | - | ------------------------------



| |  | our international expansion;
| | - | ----------------------------



| |  | results of our marketing efforts;
| | - | ---------------------------------



| |  | future competition;
| | - | -------------------



| |  | future acquisition activity;
| | - | ----------------------------



| |  | affect of changes in market interest rates on our operating results or cash flows;
| | - | ----------------------------------------------------------------------------------



| |  | operation of the business if our proposed acquisition by Trinity Ventures is not consummated; and
| | - | -------------------------------------------------------------------------------------------------



| |  | the adequacy of our existing liquidity and capital resources.
| | - | -------------------------------------------------------------



You should be aware that these statements are subject to known and unknown risks, uncertainties and other factors, including those discussed in the
section entitled Factors That May Affect Future Results, that could cause the actual results to differ materially from those suggested by the forward-looking statements.



17



---

##### Table of Contents

Overview



SciQuest provides on-demand supplier relationship management solutions that integrate organizations with their suppliers to enable comprehensive spend
management. Spend management is the ability to view and analyze all spending across an enterprise, thereby providing greater insight into purchasing functions and giving an organization control and visibility to allow it to manage spending more
effectively. SciQuests suite of modular applications helps companies to automate the spend management process. These solutions facilitate a companys purchasing functions by reducing redundant tasks throughout the cycle of finding,
acquiring and managing goods, which can result in increased efficiency, reduced cost and increased insight into an organizations buying patterns. SciQuests solutions are targeted for the life sciences and higher education markets.



We were incorporated in November 1995 and commenced operations
in January 1996. During 1996, we focused on developing our business model and the required technology. We did not begin to recognize any revenues until 1997. We launched our public e-commerce marketplace in 1999. Beginning with our acquisition of
EMAX Solution Partners, Inc. (EMAX) in 2000, we have offered software products to the scientific products industry. In 2001, we ceased our order-processing services as we focused on providing software products and services.



We are continually evaluating our product offerings with regard to meeting
our customers requirements and to acceptance in the marketplace. Also, we review the current and long-term profitability of each product. Our investment in each product is dependent upon its profitability potential. Periodically, we will
decide to increase or decrease the investment, or even divest a product, based upon these reviews and analyses. Accordingly, in March 2003 we refocused our expenditures to support our procurement platform. As a result, we reduced costs in other
areas. These cost reductions resulted in the elimination of approximately 50 full-time positions. In addition, we sold the Textco business unit to its original owners in the second quarter of 2003. During the third quarter of 2003, we also divested
our interests in the BioSupplyNet and Groton NeoChem products.



Proposed
Acquisition of SciQuest by Trinity Ventures



On April 10,
2004, we entered into a definitive acquisition agreement to be acquired by Trinity Ventures. Under the terms of the agreement, Trinity Ventures will acquire SciQuest in a transaction valued at $25,250,000 by means of a cash merger. The amount of
cash per share of outstanding share of Sciquest common stock was estimated to be approximately $6.25, assuming the acquisition closes on or about July 31, 2004. The actual per share cash consideration that will be received by our stockholders will
be equal to $25,250,000 divided by the number of all issued and outstanding shares of common stock as of the closing of the acquisition plus the number of shares of common stock subject to in-the-money stock options that are vested as of the closing
of the acquisition. The acquisition would result in SciQuest becoming wholly-owned by Trinity Ventures. If the acquisition is consummated, SciQuest will no longer be a public company and will no longer be listed on the NASDAQ National Market.



The closing of the merger is subject to a number of
conditions, including clearance by the Securities and Exchange Commission of the form of proxy statement to be sent to our stockholders for their approval of the merger and obtaining the approval of the merger by the holders of at least a majority
of the issued and outstanding shares of our common stock.



Sources of
Revenue



We generate revenues by charging license,
subscription and maintenance fees for the use of our technology. We also offer professional services related to these solutions, for activities such as project implementation and training. In addition, we receive revenue from scientific supply
manufacturers for converting their product catalogs into an electronic format, enhancing or enriching the data and distributing the information as directed by the suppliers.



Revenues consist of (1) sales of subscriptions to our hosted e-procurement and materials management solutions, (2) sales of
software licenses and fees for implementation, customization and maintenance services related to these software licenses, (3) advertising revenues from our web sites, and (4) advertising revenues from the BioSupplyNet Source Book (through 2003), an
annual catalog of industry suppliers. We expect that sales of subscriptions to our hosted e-procurement and materials management solutions, software licenses and fees for implementation, customization and maintenance services related to these
software licenses will be the primary sources of revenues in future periods.



18



---

##### Table of Contents

We sell subscriptions to our hosted e-procurement and materials management solutions. The implementation
services and the total subscription fees are recognized ratably over the term of the agreement. We realize revenue from the sale of licenses to our delivered software products, the implementation and customization of our software products and the
sale of maintenance and support contracts. We recognize revenues from the sale of licenses to our software products and implementation and customization that are deemed to be essential to the functionality of these software products, on a
percentage-of-completion basis over the period of the customization and implementation services, which generally ranges from three to nine months. We recognize revenues from the sale of maintenance and support contracts ratably over the period of
the maintenance and support agreements, which is typically twelve months. Revenues from the sale of standardized versions of software are recognized upon customer acceptance in accordance with Statement of Position 97-2, Software Revenue
Recognition.



Advertising revenues are recognized ratably
over the period in which the advertisement is displayed. Revenues from advertising included in the Source Book are recognized at the date the Source Book is published and distributed, which historically has been in the second quarter of the fiscal
year. During 2003, we divested our investment in the net assets related to BioSupplyNet (including the Source Book), Groton NeoChem and Textco, Inc. As a result, we do not anticipate earning significant future revenue from advertising related to web
sites or printed catalogues.



Restructuring



As part of a restructuring program announced in June 2001, the restructuring
charge included approximately $2.4 million of other costs and lease obligations relating to the unprofitable business lines to be eliminated. The restructuring was completed except for the lease obligations. Due to the additional excess occupancy
costs resulting from both an increase in the amount of unutilized rental space and an increase in the estimated number of months before receiving anticipated sublease proceeds because of the depressed local commercial real estate markets, we
reevaluated the 2001 provision for excess office capacity and increased the charge for restructuring by $2.9 million during 2002.



During the first quarter of 2003, we began refocusing resources to support our procurement product platform and reducing costs in other areas, which
resulted in a reduction of approximately 50 full-time positions through attrition and elimination by the end of the second quarter of 2003. The restructuring expense of $380,000 in the first quarter of 2003 represents the recognition of severance
expense covering the 36 full-time positions that were eliminated. As a result of this restructuring, additional excess office space was identified. The associated additional excess lease cost of $650,000 was charged to restructuring expense in the
second quarter of 2003. In addition, $140,000 was charged to restructuring expense in the third quarter of 2003 to reflect the actual terms of a sublease agreement signed during the third quarter that was previously estimated to begin at an earlier
date. During the fourth quarter of 2003, $112,000 was charged to restructuring expense to reflect the adjusted terms of a sublease agreement resulting from bankruptcy proceedings of the subleasee.



Application of Critical Accounting Policies



Our consolidated financial statements are prepared in accordance with
generally accepted accounting principles utilized in the U.S. Our significant accounting policies are fully described in Note 2 to the consolidated financial statements included under Item 8 of Form 10-K. However, certain of our accounting policies
are particularly important to the portrayal of our financial position and results of operations and require a higher degree of judgment and complexity. While the estimates and judgments associated with the application of these policies may be
affected by different assumptions and conditions, we believe the estimates and judgments associated with the reported amounts are appropriate in the circumstances. Our management has discussed each of the estimates and judgments described below with
the Audit Committee of the Board of Directors and has received input from the members of the committee on these estimates and judgments. The following is a summary of our more significant accounting policies and how they impact our financial
statements.



License fees and other professional services
revenue.We sell software licenses and provide professional services to implement and configure the software to meet customer needs. We record the revenue from the sale of software licenses and custom development and implementation services
under fixed-fee contracts using the percentage-of-completion method over the term of the development and implementation services. Therefore, the amount of revenue recognized is sensitive to the estimates to complete the remaining services. These
estimates are reviewed and revised monthly. Estimates are based on project managers detailed implementation plans predicated on significant historical experience. If increases in projected costs to complete are sufficient to create an overall
loss on an in-process contract, the entire estimated loss is charged against



19



---

##### Table of Contents

income in the period the estimated loss is initially identified. Revenue from the sale of standardized versions of our
software is recorded upon customer acceptance. We also sell maintenance contracts, which are recognized over the term of the arrangement. In addition, we sell subscriptions to our hosted e-procurement solutions. The implementation services and the
total subscription fees attributable to our hosted solutions are recognized ratably over the term of the agreement.



Development costs.Development costs include expenses to develop, enhance, manage, monitor and operate our web sites and costs of managing and
integrating data on our web sites and developing hosted software to be licensed. We capitalize internal use software development costs and amortize them over the estimated life of the related application, which generally ranges from three months to
two years. The amount being capitalized and the amount amortized is dependent upon our ability to track and capture all application development costs associated with these multiple projects and our ability to estimate accurately their useful lives,
respectively.



Capitalized software costs.Software
development costs related to software products sold to customers are required to be capitalized beginning when a products technological feasibility has been established and ending when a product is available for general release to customers.
These capitalized costs are then amortized over the estimated useful life of the related application, which is generally a period of two to four years. The amount being capitalized and the amount amortized is dependent upon our ability to track and
capture all application development costs associated with these multiple projects and our ability to estimate accurately their useful lives, respectively.



Allowance for doubtful accounts.We bear all risk of loss on credit sales of products, licenses and professional services. The allowance for
doubtful accounts at March 31, 2004 represents approximately 5% of total gross accounts receivable. Managements estimate is developed from analysis of each individual customer account. Based on current economic conditions and historical
experience, we believe that the allowance is adequate. However, if general economic conditions worsen, it could negatively impact the ability of customers to pay their obligations to us.



Restructuring. We previously announced three restructuring programs in prior years involving exiting certain
unprofitable business lines. Various estimates developed from assumptions are involved in calculating the restructuring charges, especially related to lease obligations. Generally accepted accounting principles require that continuing lease
obligations no longer providing economic benefit be calculated and offset by estimated sublease proceeds obtainable for the property. Estimating the potential sublease proceeds is dependent upon our ability to predict general and local economic
market conditions.



Due to the additional excess occupancy
costs resulting from both an increase in the amount of unutilized rental space and an increase in the estimated number of months before receiving anticipated sublease proceeds because of the depressed local commercial real estate markets, we
reevaluated the 2001 provision for excess office capacity and increased the charge for restructuring by $2.9 million during 2002. As a result of a 2003 restructuring, additional excess office space was identified. The associated additional excess
lease cost of $650,000 was charged to restructuring expense in the second quarter of 2003. In addition, $140,000 was charged to restructuring expense in the third quarter of 2003 to reflect the actual terms of a sublease agreement signed during the
third quarter that was previously estimated to begin at an earlier date. During the fourth quarter of 2003, $112,000 was charged to restructuring expense to reflect the adjusted terms of a sublease agreement resulting from bankruptcy proceedings of
the subleasee.



Goodwill and intangible asset valuation.We have historically evaluated the recoverability of goodwill and other intangible assets recorded on our balance sheet based on the estimated future undiscounted cash flows attributable to the assets or asset groups to which such goodwill and
intangible assets relate. We test the carrying value of goodwill annually and identifiable intangible assets when a triggering event indicates the carrying value of those identifiable intangibles may exceed the anticipated undiscounted cash flows.
We base the estimated future cash flows on actual operating budgets and other assumptions that management deems reasonable. However, because we transitioned our revenue model from e-commerce transactions to a software and related services model in
2001, there is limited history with which to base future estimated cash flows. If future operations are below our current expectations, we may need to revise these cash flow estimates downward, which may then require a writedown.



New accounting standards require a change in the methodology for measuring
impairment by estimating fair value by using a discounted cash flow approach rather than an undiscounted cash flow approach (see Note 2 to the Consolidated Financial Statements). The assumptions used in discounting cash flows attributable to the
reporting units or asset groups to which goodwill and intangible assets relate, could have a material impact on our estimates of the recoverability and fair value of these assets and, in turn, impact the necessity and magnitude of a future
impairment charge.



20



---

##### Table of Contents

We adopted Statement of Financial Accounting Standards No. 142, Goodwill and other Intangible
Assets (SFAS No. 142) effective January 1, 2002. This statement addresses accounting and reporting for acquired goodwill and intangible assets. As of the end of each period presented, all of our intangible assets had definitive
lives and were being amortized accordingly.



We evaluate the
recoverability of our intangible assets subject to amortization in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144). SFAS No.
144 requires long-lived assets to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment is recognized in the event that the net book value of an asset exceeds
the sum of the future undiscounted cash flows attributable to such asset or the business to which such asset relates and the net book value exceeds fair value. The impairment amount would be measured as the amount by which the carrying amount of a
long-lived asset (or asset group) exceeds its fair value.



Internal Controls



Our Chief Executive Officer and our Controller, who
serves as our principal financial officer, have reviewed the effectiveness of our companys disclosure controls and procedures as of March 31, 2004 (the Evaluation Date). Based on this review, these officers believe that such
disclosure controls and procedures as of the Evaluation Date were adequate to ensure that material information relating to our company, including its consolidated subsidiaries, is made known to management by others within the company and its
consolidated subsidiaries. To these officers knowledge, there were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date.



Three Months Ended March 31, 2004 and 2003



Revenues



Revenues for the three months ended March 31, 2004 and 2003 have been
derived primarily from the sale of subscriptions to and implementations of our hosted e-procurement and materials management solutions, from the sale of licenses of our software products and from fees charged for the implementation and customization
of our software products.



During the three months ended March
31, 2004 and 2003, we recognized $1.9 million and $1.7 million, respectively, of revenue from fees from licenses and other professional services.



During the three months ended March 31, 2004, one customer accounted for 16% of revenues from continuing operations. There can be no assurance that this
customer will continue to purchase at this level.



Cost of
Revenues



Cost of revenues for license fees and other
professional services primarily consist of personnel costs for employees who work directly on the development and implementation of customized electronic research solutions and who provide maintenance to customers as well as the amortization of
capitalized software development costs.



Cost of revenues for
license fees and other professional services from continuing operations for the three months ended March 31, 2004 and 2003 was $1.0 million and $1.8 million, respectively, of which $0.6 million and $1.1 million, respectively, related to the
amortization of acquired and capitalized software development costs. Cost of revenues for licenses and other professional services from continuing operations for the three months ended March 31, 2004, decreased primarily due to reduced amortization
of acquired and capitalized software development costs.



21



---

##### Table of Contents

Gross Profit



Gross profit increased to $0.9 million for the three months ended March 31, 2004 from $(0.2) million for the three months
ended March 31, 2003. The increase in gross profit relating to licenses and professional fees is primarily attributable to the decrease in amortization of acquired and capitalized software development costs to $0.6 million from $1.1 million.



Operating Expenses



Development Expenses. Development expenses consist primarily of
personnel and related costs to develop, operate and maintain our software, aggregate data and the amortization of capitalized development costs.



Development expenses increased to $1.7 million for the three months ended March 31, 2004 from $1.4 million for the three months ended March 31, 2003.
During the three months ended March 31, 2004 and 2003, we capitalized approximately $0.4 million and $0.7 million, respectively, of certain costs related to software and hosted application development projects.



Included in development expenses is the amortization of non-cash stock-based
employee compensation expense, which totaled approximately $0 and $62,000 for the three months ended March 31, 2004 and 2003, respectively. This is primarily due to stock options that had been issued to employees with exercise prices less than fair
value on the date of grant. Deferred compensation recorded due to the issuance of such stock options is charged to stock-based employee compensation expense over the vesting term of the options. The number of such stock options has been reduced due
to headcount reductions during 2003, resulting in reduced non-cash expense.



We expect our development expenses for the remaining quarters of 2004 to be similar to the first quarter of 2004.



Sales and Marketing Expenses. Sales and marketing expenses consist primarily of operating expenses such as salaries and other related costs for
sales and marketing personnel, travel expenses, public relations expenses and marketing materials as well as amortization of non-cash stock-based customer acquisition costs.



Total sales and marketing expenses decreased to $1.2 million for the three months ended March 31, 2004 from $1.3 million for
the three months ended March 31, 2003.



Stock-based customer
acquisition costs represent the amortization of deferred customer acquisition costs that were initially recorded in November 1999 upon the issuance of common stock warrants to key suppliers and customers. The value of these warrants is adjusted each
reporting period based upon the closing trading price of our common stock at each balance sheet date. Decreases in our closing trading price from one reporting period to the next will likely result in a benefit, and increases in our closing trading
price will likely result in charges to expense. Because the amortization of these costs is dependent upon the trading price of our common stock, the future amounts of this amortization will vary based on trading price fluctuations. During 2001 and
the second half of 2002, the majority of these warrants were cancelled. Non-cash stock-based customer acquisition costs for the three months ended March 31, 2004 decreased to approximately $1,600 from $4,900 for the three months ended March 31, 2003
and are expected to be minimal in the future due to the reduced number of warrants outstanding.



Also included in sales and marketing expense is the amortization of non-cash stock-based employee compensation expense, which totaled approximately $0 and
$(2,400) for the three months ended March 31, 2004 and 2003, respectively. This is primarily due to stock options that had been issued to employees with exercise prices less than fair value on the date of grant. Deferred compensation recorded due to
the issuance of such stock options is charged to stock-based employee compensation expense over the vesting term of the options. The number of such stock options has been reduced due to the headcount reductions during 2003, resulting in reduced
non-cash expense.



We expect our sales and marketing expenses
to increase slightly compared to 2003, as we increase the focus of our sales and marketing efforts on our procurement product platform.



22



---

##### Table of Contents

General and Administrative Expenses. General and administrative expenses consist primarily of
operating expenses such as personnel and related costs for our general corporate functions, including finance, accounting, legal, human resources, investor relations and facilities as well as the amortization of intangibles.



Total general and administrative expenses decreased to $1.5 million for the
three months ended March 31, 2004 from $2.4 million for the three months ended March 31, 2003. This decrease in general and administrative expenses is primarily the result of decreased operating and lease costs related to the restructuring initiated
during 2003, reduced depreciation and amortization expense and a reduction of $175,000 in bad debt expense due to settlement of litigation. These reductions were partially offset by an increase in professional services related to the proposed
acquisition of SciQuest by Trinity Ventures.



Included in
general and administrative expenses is the amortization of non-cash stock-based employee compensation expense, which totaled approximately $0 and $12,000 for the three months ended March 31, 2004 and 2003, respectively. This is primarily due to
stock options that had been issued to employees with exercise prices less than fair value on the date of grant. Deferred compensation recorded due to the issuance of such stock options is charged to stock-based employee compensation expense over the
vesting term of the options. The number of such stock options has been reduced due to the headcount reductions during 2003, resulting in reduced non-cash expense.



Also included in general and administrative expenses is the amortization of intangible assets totaling approximately $18,000
and $18,000 for the three months ended March 31, 2004 and 2003, respectively. This amortization of intangible assets relates to our acquisitions.



We expect general and administrative expenses to be slightly lower in 2004 compared to 2003 due to the higher level of personnel employed during the first
part of 2003. However, this reduction may be offset by additional professional services expected to be incurred in connection with the proposed acquisition of SciQuest by Trinity Ventures.



Restructuring. During the first quarter of 2003, we began refocusing
resources to support our procurement product platform and reducing costs in other areas, which resulted in an elimination of approximately 50 full-time positions by the end of the second quarter of 2003. The restructuring expense of $380,000 in the
first quarter of 2003 represents the recognition of severance expense covering the final 36 full-time positions. There was no restructuring expense incurred during the first quarter of 2004.



Other Income (Expense)



Other income (expense) primarily consists of interest income earned on cash
deposited in money market accounts and other short and long-term investments partially reduced by interest expense incurred on debt obligations. Net other income (expense) increased to $0.5 million for the three months ended March 31, 2004 from $0.1
million for the three months ended March 31, 2003. This increase was primarily from settlement proceeds of a litigation that was partially offset by reduced interest income resulting from our use of cash and investments to fund operations during the
last twelve months. We expect net interest income to continue to be lower in 2004 than in 2003.



Loss from Discontinued Operations



During the second quarter of 2003, we sold Textco, Inc. As a result, we reclassified previously reported revenue and expense items from the respective
lines in the Statement of Operations to Loss from Discontinued Operations. The loss from Textco, Inc. operations was approximately $90,000 during the three months ended March 31, 2003. Revenues and gross profit were approximately $193,000 and
$34,000 for the three months ended March 31, 2003. There was no loss on discontinued operations in 2004 or adjustment to the previously recorded loss on the sale of the unit of approximately $247,000 during the second quarter of 2003.



Net Loss



Net loss decreased to $3.1 million for the three months ended March 31, 2004
from $5.5 million for the three months ended March 31, 2003. The reduction in net loss was primarily due to increased revenue and related gross profit due to



23



---

##### Table of Contents

decreased amortization of capitalized software, reduced depreciation and amortization expense, decreased operating and
lease costs related to the restructuring initiated during 2003 and the reduction of bad debt expense and increase in other assets due to the $450,000 of litigation settlement proceeds.



Liquidity and Capital Resources



We have primarily funded our operations through private placements of our preferred stock during 1998 and 1999 and our initial public offering which
closed in November 1999. As of March 31, 2004, we had total cash and investments of $16.7 million, which is comprised of cash and cash equivalents of $9.5 million, short-term investments of $3.3 million and long-term investments of $3.9 million.



Cash used in operating activities was $2.2 million and $2.6
million during the three months ended March 31, 2004 and 2003, respectively. Cash used in operating activities was principally for the development of our software solutions, our sales and marketing efforts and administration.



Cash provided (used) by investing activities during the three months ended
March 31, 2004 and 2003 was $(1.4) million and $9.4 million, respectively. Cash used in investing activities has primarily been comprised of purchases of investments in US government obligations, commercial paper and corporate bonds, purchases of
computer equipment and the capitalization of certain costs associated with the development of our hosted applications and with the development of research software systems. Cash was primarily provided from the maturity of investments.



Cash provided (used) by financing activities during the three months ended
March 31, 2004 and 2003 was approximately $1,000 and $(0.5) million, respectively. During the three months ended March 31, 2003, we repurchased 119,858 shares of our common stock for $0.5 million.



During the three months ended March 31, 2004, we incurred an operating loss
of $3.5 million. During the two years ended December 31, 2003 we incurred cumulative operating losses of $50 million and used $19.3 million of cash in operations. We have reduced our quarterly spending to an average of $2.4 million for net cash used
in operating activities for the last eleven quarters following our 2001 restructuring. Based on this spending level, adjusted for our anticipated additional capital needs, we believe that our existing cash and investments of $16.7 million at March
31, 2004 will be sufficient to satisfy our cash requirements for more than the next twelve months. However, lower than expected cash flows as a result of lower revenues or increased expenses could require us to raise additional capital in order to
maintain our operations. There are significant uncertainties, based on recent economic conditions and our limited operating experience as a software and related services provider, as to whether debt or equity financing will be available if we are
required to seek additional funds. Even if we are able to secure funds in the debt or equity markets, we may not be able to do so on terms that are favorable or acceptable to us. Any additional equity financing, if available, could result in
substantial dilution to our existing stockholders.



If we are
unable to raise additional capital to continue to support our operations, we might be required to scale back, delay or discontinue one or more of our product offerings, which could have a material adverse affect on our business. Reduction or
discontinuation of any one of our business components or product offerings could result in additional charges, which would be reflected in the period of the reduction or discontinuation.



Off-Balance Sheet Arrangements



Other than the contractual obligations described in our annual report on Form 10-K, filed with the SEC on March 25, 2004, we have no off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.



Related Party Transactions



In February 2002, we guaranteed an $80,000 loan for Mr. M. Scott Andrews, a
member of the Board of Directors and co-founder. The loan bears interest at prime rate and becomes payable in full in February 2004. We have agreed to reimburse Mr. Andrews for interest paid on this loan. The transaction was approved by a majority
of our disinterested directors. Mr. Andrews repaid the entire loan in February 2004, and consequently we have been released from our guarantee on this loan arrangement.



24



---

##### Table of Contents

The Sarbanes-Oxley Act of 2002 prohibits companies from extending credit or arranging for the extension
of credit for any director or executive officer in the form of a personal loan. Credit arrangements that were in place prior to this act may be maintained, but not renewed. Accordingly, we are fully compliant with this act and did not renew our
guarantee after the maturity of this loan.



New Accounting Pronouncements



In April 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149). FASB Statements No. 133 Accounting for Derivative Instruments and
Hedging Activities and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, establish accounting and reporting standards for derivative instruments including derivatives embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No. 149 amends Statement 133 for certain decisions made by the Board as part of the Derivatives Implementation Group (DIG) process. This Statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, and FASB Statements No. 65, Accounting for Certain Mortgage Banking Activities, No. 91 Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from Certain Required Disclosures about Financial
Instruments for Certain Nonpublic Entities. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any material impact on our financial statements or
results of operations.



In January 2003, the Financial
Accounting Standards Board issued Financial Accounting Series FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN No. 46). The primary objective of the Interpretation
is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities (VIEs). FIN No. 46 has far-reaching
effects and applies immediately to new entities created after January 31, 2003, as well as applies to existing entities in which an enterprise obtains an interest after that date. The provisions of FIN No. 46 are effective at the end of the first
interim or annual period ending after December 15, 2003, to variable-interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN No. 46 is the guidance that determines (1) whether consolidation is
required under the controlling financial interest model of Accounting Research Bulletin No. 51, Consolidated Financial Statements, or other existing authoritative guidance, or, alternatively, (2) whether the variable-interest
model under FIN No. 46 should be used to account for existing and new entities. The adoption of FIN No. 46 did not have any material impact on our financial statements or results of operations.



In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for classification and measurement in
the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective on July 1, 2003. The adoption of
SFAS No. 150 did not have any material impact on our financial statements or results of operations.



Factors That May Affect Future Results



Our future operating results may vary substantially from period to period based on a number of factors. The price of our common stock will fluctuate in the future, and an investor in our common stock is subject to a
variety of risks, including but not limited to the specific risks identified below. Current and prospective investors are strongly urged to carefully consider the various cautionary statements and risks set forth below and elsewhere in this report.



25



---

##### Table of Contents

Since we have a limited operating history with our evolving business model, forecasting future performance may be
difficult.



Our business model has evolved considerably
since our companys inception. For instance, we launched our public e-commerce marketplace in April 1999. Beginning with our acquisition of EMAX in March 2000, we have increasingly focused our efforts on providing software products and services
to enhance research operations for pharmaceutical, biotechnology and other research-based organizations. We discontinued our order processing services in 2001. In 2002, we acquired the business operations of Textco, Groton NeoChem and HigherMarkets,
each of which added new products and/or target markets to our business model. In 2003, we refocused our expenditures to support our procurement and materials management platform and divested the Textco business unit and the products related to
BioSupplyNet and Groton NeoChem. Accordingly, we have only a limited operating history on which to evaluate our evolving business model. As a result of our limited operating history and the evolving nature of our business model, we may be unable to
accurately forecast our revenues. We incur expenses based predominantly on operating plans and estimates of future revenues. Revenues to be generated from newly developed and evolving activities will be particularly difficult to forecast accurately.
Our expenses are to a large extent fixed. We may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfalls. Accordingly, a failure to meet our revenue projections will have an immediate and negative
impact on profitability. Finally, we cannot be certain that our evolving business model will be successful, particularly in light of our limited operating history.



We have a history of losses and anticipate incurring losses in the future. We may not achieve profitability.



We incurred a net loss of $3.1 million for the three months ended March 31,
2004. To date, we have not realized any profits, and as of March 31, 2004, we had an accumulated deficit of $296 million. We expect to incur substantial operating losses and continued negative cash flow from operations for the foreseeable future. In
fact, we expect to continue generating losses through at least 2004. We may not be able to increase revenues sufficiently to achieve profitability.



Our future profitability and cash flows are dependent upon our ability to control expenses.



Our operating plan to achieve profitability is based upon estimates of our future expenses. For instance, as compared to
2003, we expect our development expenses in 2004 to be comparable while we expect our sales and market expenses to increase slightly in 2004 and our general and administrative expenses to decrease slightly in 2004. If our future expenses are greater
than anticipated, our ability to achieve profitability when expected may be negatively impacted. In addition, greater than anticipated expenses may negatively impact our cash flows, which could cause us to expend our capital faster than anticipated.
While we expect our existing capital to be sufficient for more than the next twelve months, lower than expected cash flows due to increased expenses could require us to raise additional capital or significantly reduce expenses in order to maintain
our operations. There can be no assurance that we will be able to raise such funds on favorable terms, or at all. Also, a large percentage of our expenses are relatively fixed, which may make it difficult to reduce expenses significantly in the
future.



Our future profitability and cash flows are also dependent upon our
ability to achieve revenue growth.



Our operating plan to
achieve profitability is based upon estimates of our revenues and assumes that we will achieve license fee and related revenues that substantially exceed historical levels. Our ability to achieve this projected revenue growth is largely dependent on
the results of our sales efforts. We increased certain sales and marketing expenses in 2003 in an effort to increase our revenue generation. We cannot assure you that our sales force will be successful in achieving the sales levels required to
achieve profitability. If our future revenues are less than anticipated, our ability to achieve profitability when expected may be negatively impacted. In addition, lower than anticipated revenues may negatively impact our cash flows, which could
cause us to expend our capital faster than anticipated. While we expect our existing capital to be sufficient for more than the next twelve months, lower than expected cash flows as a result of lower revenues could require us to raise additional
capital in order to maintain our operations. There can be no assurance that we will be able to raise such funds on favorable terms, or at all.



Sales to larger customers may result in long sales cycles and decrease our profit margins.



Sales to large enterprise buyers are an important element of our business strategy. As we sell sophisticated solutions to
larger organizations, we expect the average time from initial contact to final approval to be significant. During this sales



26



---

##### Table of Contents

cycle, we may expend substantial funds and management resources without any corresponding revenue. If approval is delayed
or does not occur, our financial condition and operating results for a particular period may be adversely affected. Approvals are subject to delays over which we have little or no control, including the following:



| |  | potential customers internal approval processes;
| | - | -------------------------------------------------



| |  | budgetary constraints for information technology spending;
| | - | ----------------------------------------------------------



| |  | implementation of systems integration solutions;
| | - | ------------------------------------------------



| |  | customers concerns about implementing a new strategy and method of doing business; and
| | - | ---------------------------------------------------------------------------------------



| |  | seasonal and other timing effects.
| | - | ----------------------------------



Sales to large accounts may result in lower profit margins than other sales as larger customers typically have greater leverage in negotiating the price
and other terms of business relationships. We also incur costs associated with customization of certain products and services with a sale to a large account. If we do not generate sufficient revenues to offset any lower margins or these increased
costs, our operating results may be materially and adversely affected. Also, the time between billing and receipt of revenues is often longer when dealing with larger accounts due to increased administrative overhead.



We have relied, and continue to rely, on a limited number of large customers for a
significant portion of our revenues. Losing one or more of these customers may adversely affect our revenues.



We expect that for the foreseeable future we will generate a significant portion of our revenues from a limited number of large customers. During the
three months ended March 31, 2004, one customer accounted for 16% of our total revenues. Such large transactions are often non-recurring, making it difficult to predict future transactions. The failure of one or more large transactions to
occur in any given period may materially and adversely affect our revenues for that period. If we lose any of our large customers or if we are unable to add new large customers, our revenues will not increase as expected. In addition, our reputation
and brand name would be harmed.



This customer concentration
may also increase our accounts receivable credit risk from time to time. The failure by any large customer to make payments when due would negatively impact our cash flows.



We are investing significantly in developing and acquiring new product and service offerings with no guarantee of success.



Expanding our product and service offerings is an
important component of our business strategy. As such, we are expending a significant amount of our resources in these development and acquisition efforts. Any new offerings that are not favorably received by prospective customers could damage our
reputation or brand name. Expansion of our services will require us to devote a significant amount of time and money and may strain our management, financial and operating resources. We cannot assure you that our development or acquisition efforts
will result in commercially viable products or services. In 2003, for instance, we sold the Textco business unit to its original owners and divested our interests in the BioSupplyNet and Groton NeoChem products. In addition, we may bear development
and acquisition costs in current periods that do not generate revenues until future periods, if at all. To the extent that we incur expenses that do not result in increased current or future revenues, our earnings may be materially and adversely
affected.



Unless a broad range of purchasers and suppliers of products
adopt our products and services, we will not be successful.



Our success will require, among other things, that our solutions gain broad market acceptance by purchasers and suppliers of products. For example, purchasers may continue managing assets and purchasing products through their existing
methods and may not adopt new technology solutions because of:



| |  | their comfort with current purchasing and asset management procedures;
| | - | ----------------------------------------------------------------------



| |  | the costs and resources required to adopt new business procedures;
| | - | ------------------------------------------------------------------



27



---

##### Table of Contents

| |  | reductions in capital expenditures or information technology spending;
| | - | ----------------------------------------------------------------------



| |  | security and privacy concerns; or
| | - | ---------------------------------



| |  | general reticence about technology or the Internet.
| | - | ---------------------------------------------------



If we do not successfully market the SciQuest brand, our business may suffer.



We believe that establishing, maintaining and enhancing the SciQuest brand is critical in expanding our customer base. Some
of our competitors already have well-established brands. Promotion of our brand will depend largely on continuing our sales and marketing efforts and providing high-quality products and services to our enterprise customers. We increased certain
sales and marketing expenses in 2003. We cannot assure you that these additional expenses will be successful in generating additional revenue. We cannot be certain that our new marketing efforts will be successful in marketing the SciQuest brand. If
we are unable to successfully promote our brand, or if we incur substantial expenses in attempting to do so, our revenues and earnings could be materially and adversely affected.



Our future revenue growth could be impaired if our investment in indirect sales channels for our products is unsuccessful.



We have invested significant time and resources in
developing indirect sales channels for our products through relationships with companies such as SCT. We cannot assure you that our indirect sales channels will be successful or that we will be able to develop additional indirect sales channels. If
these sales channels do not result in significant amounts of sales, our ability to achieve our revenue projections may be impaired. As we develop additional indirect sales channels, we may experience conflicts with our direct sales force to the
extent that these sales channels target the same customer bases. Successful management of these potential conflicts will be necessary in order to maximize our revenue growth.



If we are not able to successfully integrate our systems with the internal systems of our customers, our operating costs and
relationships with our suppliers and buyers will be adversely affected.



A key component of our products and services is the efficiencies created for suppliers and buyers. In order to create these efficiencies, it will often be necessary that our solutions integrate with customers
internal systems, such as inventory, customer service, technical service, ERP systems and financial systems. In addition, there is little uniformity in the systems used by our customers. If these systems are not successfully integrated,
relationships with our customers will be adversely affected, which could have a material adverse effect on our financial condition and results of operations.



If we are unable to adapt our products and services to rapid technological change, our revenues and profits could be materially and adversely affected.



Rapid changes in technology, products and services, user profiles and
operating standards occur frequently. These changes could render our proprietary technology and systems obsolete. We must continually improve the performance, features and reliability of our products and services, particularly in response to our
competition.



Our success will depend, in part, on our ability
to:



| |  | enhance our existing products and services;
| | - | -------------------------------------------



| |  | develop new services and technologies that address the increasingly sophisticated and varied needs of our target markets; and
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
| | - | ---------------------------------------------------------------------------------------------------------------------



We cannot be certain of our success in accomplishing the foregoing. If we are
unable, for technical, legal, financial or other reasons, to adapt to changing market conditions or buyer requirements, our market share could be materially and adversely affected.



28



---

##### Table of Contents

Product development delays could damage our reputation and sales efforts.



Developing new products and updated versions of our existing products for
release at regular intervals is important to our business efforts. At times, we may experience delays in our development process that result in new releases being delayed or lacking expected features or functionality. New product or version releases
that are delayed or do not meet expectations may result in customer dissatisfaction, which in turn could damage significantly our reputation and sales efforts.



The market for technology solutions is highly competitive, which makes achieving market share and profitability more difficult.



The market for technology solutions in the life sciences and higher
education markets is new, rapidly evolving and intensely competitive. We experience competition from multiple sources, which makes it difficult for us to develop a comprehensive business strategy that addresses all of these competitive factors.
Competition is likely to intensify as this market matures.



As
competitive conditions intensify, competitors may:



| |  | devote greater resources to marketing and promotional campaigns;
| | - | ----------------------------------------------------------------



| |  | devote substantially more resources to product development;
| | - | -----------------------------------------------------------



| |  | secure exclusive arrangements with customers that impede our sales; and
| | - | -----------------------------------------------------------------------



| |  | enter into strategic or commercial relationships with larger, more established and well-financed companies.
| | - | -----------------------------------------------------------------------------------------------------------



In addition, new technologies and the expansion of existing technologies may
increase competitive pressures. As a result of increased competition, we may experience reduced operating margins, as well as loss of market share and brand recognition. We may not be able to compete successfully against current and future
competitors. These competitive pressures could have a material adverse effect on our revenue growth and earnings.



Our future revenue growth may be adversely affected by a significant reduction in spending in the life sciences and higher education markets.



We derive a significant portion of our revenue from the life sciences and
higher education markets, primarily through fees for our software products and services. We expect our future growth to depend on spending levels in these markets. In addition, many companies have reduced spending on information technology products
in response to current economic conditions. Any significant reduction in spending in the life sciences and higher education markets may have a material adverse effect on our revenues.



Our computer and telecommunications systems are in a single location, which makes them more vulnerable to damage or interruption.



Substantially all of our computer and telecommunications
systems are located in the same geographic area. These systems are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins and similar events. While we have business interruption insurance, this
coverage may not adequately compensate us for lost business. Although we have implemented network security measures, our systems, like all systems, are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. These
disruptions could lead to interruptions, delays and loss of data with respect to our hosted products. Any of these occurrences could have a material adverse effect on our revenues.



29



---

##### Table of Contents

If we are unable to protect our intellectual property rights, our business could be materially and adversely affected.



Any misappropriation of our technology or the development
of competing technology could seriously harm our business. We regard a substantial portion of our software products as proprietary and rely on a combination of copyright, trademark and trade secrets, customer license agreements and employee and
third-party confidentiality agreements to protect our proprietary rights. These protections may not be adequate, and we cannot assure you that they will prevent misappropriation of our intellectual property, particularly in foreign countries where
the laws may not protect proprietary rights as fully as do the laws of the United States. Other companies could independently develop similar or competing technology without violating our proprietary rights. The process of enforcing our intellectual
property rights through legal proceedings would likely be burdensome and expensive, and our ultimate success could involve a high degree of risk.



Our products, trademarks and other proprietary rights may infringe on the proprietary rights of third parties, which may expose us to litigation.



While we believe that our products, trademarks and other proprietary rights
do not infringe upon the proprietary rights of third parties, we cannot guarantee that third parties will not assert infringement claims against us in the future, particularly with respect to technology that we acquire through acquisitions of other
companies. Any such claims could require us to enter into a license agreement or royalty agreement with the party asserting a claim. Even the successful defense of an infringement claim could result in substantial costs and diversion of our
managements efforts.



We are dependent on proprietary content and
technology licensed from third parties, the loss of which could be costly.



We license a portion of the content and proprietary technology for our products and services from third parties. These third-party licenses may not be available to us on favorable terms, or at all, in the
future. In addition, we must be able to successfully integrate this content and proprietary technology in a timely and cost-effective manner to create an effective finished product. If we fail to obtain the necessary third-party licenses on
favorable terms or are unable to successfully integrate this content and proprietary technology on favorable terms, it could have a material adverse effect on our business operations.



Product defects or software errors in our products could adversely affect our business due to costly redesigns, production delays and
customer dissatisfaction.



Design defects or software
errors in our products may cause delays to product introductions or reduce customer satisfaction, either of which could materially and adversely affect our product sales and revenues. Our software products are highly complex and may contain design
defects or software errors from time to time that may be difficult to detect or correct. In addition, our products are often critical to our customers business operations, which may magnify the impact of any design defects or software errors.
Although we have license agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities arising from customers, these provisions may not effectively protect us against all claims. In
addition, claims arising from customer dissatisfaction could significantly damage our reputation and sales efforts.



If we fail to attract and retain key employees, our business may suffer.



A key factor of our success will be the continued services and performance of our executive officers and other key personnel. If we lose the services
of any of our executive officers, our financial condition and results of operations could be materially and adversely affected. We do not have long-term employment agreements with any of our key personnel. Our success also depends upon our ability
to identify, hire and retain other highly skilled technical, managerial, editorial, sales, marketing and customer service professionals. Competition for such personnel is intense. We cannot be certain of our ability to identify, hire and retain
adequately qualified personnel. For example, we may encounter difficulties in attracting a sufficient number of qualified software developers. Failure to identify, hire and retain necessary technical, managerial, editorial, merchandising, sales,
marketing and customer service personnel could have a material adverse effect on our financial condition and results of operations.



Many of our key executives and other employees have been employed by us for two years or less. If our employees do not work well together or some of our
employees do not succeed in their designated roles, our financial condition and results of operations could be materially and adversely affected. We cannot be certain that our management, operational and financial resources will be adequate to
support our future operations.



30



---

##### Table of Contents

The failure to integrate successfully businesses that we have acquired or may acquire could adversely affect our
business.



We have acquired and intend to continue seeking
opportunities to acquire complementary businesses. For example, we acquired EMAX in 2000, and HigherMarkets in 2002. An element of our strategy is to broaden the scope and content of our products and services through the acquisition of existing
products, technologies, services and businesses. Acquisitions entail numerous risks, including:



| |  | the integration of new operations, products, services and personnel;
| | - | --------------------------------------------------------------------



| |  | the diversion of resources from our existing businesses, sites and technologies;
| | - | --------------------------------------------------------------------------------



| |  | the inability to generate revenues from new products and services sufficient to offset associated acquisition costs;
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | the maintenance of uniform standards, controls, procedures and policies;
| | - | ------------------------------------------------------------------------



| |  | accounting effects that may adversely affect our financial results;
| | - | -------------------------------------------------------------------



| |  | the impairment of employee and customer relations as a result of any integration of new management personnel;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | dilution to existing stockholders from the issuance of equity securities; and
| | - | -----------------------------------------------------------------------------



| |  | liabilities or other problems associated with an acquired business.
| | - | -------------------------------------------------------------------



We may have difficulty in effectively assimilating and integrating these businesses, or any future joint ventures, acquisitions or alliances, into our
operations. Any difficulties in the process could disrupt our ongoing business, distract our management and employees, increase our expenses and otherwise adversely affect our business. Any problems we encounter in connection with our acquisitions
could have a material adverse effect on our business.



Our planned growth
from international customers will require financial resources and management attention and could have a negative effect on our earnings.



We are investing resources and capital to expand our sales internationally, particularly in Europe. This will require financial resources and management
attention and could have a negative effect on our earnings. We cannot be assured that we will be successful in creating international demand for our solutions and services. In addition, our international business may be subject to a variety of
risks, including, among other things, increased costs associated with maintaining international marketing efforts, applicable government regulation, fluctuations in foreign currency, difficulties in collecting international accounts receivable and
the enforcement of intellectual property rights. We cannot assure you that these factors will not have an adverse effect on future international sales and earnings. In addition, we are currently contemplating registering our trademarks in other
countries. We cannot be assured that we will be able to do so.



Significant
fluctuation in the market price of our common stock could result in securities class action claims against us.



Significant price and value fluctuations have occurred with respect to the securities of technology companies. Our common stock price has been volatile
and is likely to be volatile in the future. In the past, following periods of downward volatility in the market price of a companys securities, class action litigation has often been pursued against such companies. If similar litigation were
pursued against us, it could result in substantial costs and a diversion of our managements attention and resources.



31



---

##### Table of Contents

New accounting rules could be proposed that could adversely affect our reported financial results.



Our financial statements are prepared based on generally accepted accounting
principles and SEC accounting rules. These principles and rules are subject to change from time to time for various reasons. While we believe we meet all current financial reporting requirements, we cannot predict at this time whether any
initiatives will be proposed or adopted that would require us to change our accounting policies. Any change to generally accepted accounting principles or SEC rules could adversely affect our reported financial results.



There is a risk that our proposed merger will not be completed.



On April 12, 2004, we announced that we had entered into a definitive merger
agreement to be acquired by Trinity Ventures by means of a cash merger. Completion of the merger is subject to certain risks, including, but not limited to, the following:



| |  | that our stockholders will not approve the merger
| | - | -------------------------------------------------



| |  | that we will not be able to obtain all necessary third-party consents to the merger;
| | - | ------------------------------------------------------------------------------------



| |  | that we will not have performed, in all material respects, our obligations contained in the merger agreement prior to the effective time of the merger;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | that the representations and warranties made by us in the merger agreement will not be true and correct, in all material respects, at the closing date of the merger;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | that we may experience a material adverse effect with respect to our business; and
| | - | ----------------------------------------------------------------------------------



| |  | that there may be litigation that could prevent the merger.
| | - | -----------------------------------------------------------



As a result of various risks to the completion of the merger, we cannot assure you that the merger will be completed even if stockholder approval is
obtained. If the merger is not completed for any reason, our management will continue to manage SciQuest as an ongoing business. If the merger is not completed, depending on the circumstances, we may be required to reimburse certain expenses of
Trinity Ventures. Further, if the merger is not completed due to a termination of the merger agreement, our public perception could be adversely affected.



The terms of our merger agreement prohibit us from soliciting alternative transactions.



Under the terms of our merger agreement, we, our directors, officers and representatives are prohibited from (1) soliciting,
initiating or encouraging any alternative business combination proposal or (2) participating in, encouraging any discussions or negotiating with, or furnishing information with respect to, any inquiries or the making of any alternative business
combination proposals. In addition, the merger agreement places additional restrictions on how we may respond to an alternative business combination proposal. These restrictions may have the effect of discouraging or preventing an alternative
arrangement that may provide more value to our stockholders than the merger.



Item 3:Quantitative and Qualitative Disclosures About Market Risk



Most of our cash equivalents, short-term and long-term investments and capital lease obligations are at fixed interest rates, therefore the fair value of
these investments is affected by changes in market interest rates. However, because our investment portfolio is primarily comprised of investments in U.S. Government obligations and high-grade commercial paper, an immediate 10% change in market
interest rates would not have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.



32



---

##### Table of Contents

PART II



OTHER INFORMATION



Item 1.Legal Proceedings.



SciQuest and three of its officers were named as defendants in a lawsuit filed on September 10, 2001 in the United States District Court, Southern District of New York, captioned Patricia Figuerido v. Sciquest.com,
Inc, No. 01 CV 8467. The case subsequently was consolidated for pretrial purposes with approximately 1,000 other lawsuits filed against more than 300 other issuers, certain of their officers and directors, and the underwriters of their initial
public offerings, under the caption In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). After the cases were consolidated, plaintiffs filed a Master Complaint and 309 consolidated amended complaints related to each issuer
defendants offering. The consolidated amended complaint in In re Sciquest.com, Inc. Initial Public Offering Securities Litigation, No. 01 Civ. 7415, purports, on behalf of a putative class of purchasers of our common stock from our initial
public offering through December 6, 2000, to state claims under the Securities Act of 1933 and under the Securities Exchange Act of 1934 against SciQuest and seven investment banking firms who either served as underwriters, or are the successors in
interest to underwriters, of our initial public offering. Separate claims against the underwriters only, also have been brought under the Securities Act and the Exchange Act. The complaint alleges that the prospectus used in our initial public
offering contained material misstatements or omissions regarding the underwriters allocation practices and compensation in connection with the initial public offering and also alleges that the underwriters manipulated the aftermarket for our
common stock. In October 2002, the claims against the Companys officers were dismissed without prejudice. In February 2003, the court denied SciQuests motion to dismiss the action against it. On July 1, 2003, a Special Committee of the
Board acting on behalf of the Company authorized the Company to enter into a definitive settlement agreement to be prepared under the terms outlined in a Memorandum of Understanding. The anticipated settlement will be subject to court approval
following notice to class members and a fairness hearing. Until final approval of the settlement by the court, we intend to continue our vigorous defense against the action that originally sought an unspecified amount of damages, together with
interest, costs and attorneys fees.



Until the definitive
settlement agreement is finalized and executed, we can provide no assurances with regard to the final outcome of this matter. Adverse judgments in this matter could have a material adverse effect on our consolidated financial position, liquidity or
consolidated results of operations.



Item 2.Changes in Securities.



Not applicable.



Item 3.Defaults In Securities.



Not applicable.



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



Not applicable



Item 5.Other Information.



None.



33



---

##### Table of Contents

Item 6.Exhibits and Reports on Form 8-K



(a) The following exhibits are filed as a part of, or are incorporated by reference into, this report on Form 10-Q:



|               |  |                                                                                                                                                                                                         
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                             
|3.1*           |  | Second Amended and Restated Certificate of Incorporation of SciQuest.                                                                                                                                   
|               | 
|3.2*******     |  | Amendment to Second Amended and Restated Certificate of Incorporation of SciQuest.                                                                                                                      
|               | 
|3.3********    |  | Amendment No. 2 to Second Amended and Restated Certificate of Incorporation of SciQuest.                                                                                                                
|               | 
|3.4*           |  | Amended and Restated Bylaws of SciQuest.                                                                                                                                                                
|               | 
|4.1*           |  | See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws of SciQuest defining rights of the holders of Common Stock of
SciQuest.
|               | 
|4.2*********   |  | Specimen Stock Certificate.                                                                                                                                                                             
|               | 
|10.1*          |  | SciQuest Stock Option Plan dated as of September 4, 1997.                                                                                                                                               
|               | 
|10.2*          |  | Amendment No. 1 to SciQuest Stock Option Plan dated as of September 11, 1998.                                                                                                                           
|               | 
|10.3*          |  | Amendment No. 2 to SciQuest Stock Option Plan dated as of February 26, 1999.                                                                                                                            
|               | 
|10.4*          |  | Amendment No. 3 to SciQuest Stock Option Plan dated as of March 1, 1999.                                                                                                                                
|               | 
|10.5*          |  | Amendment No. 4 to SciQuest Stock Option Plan dated as of August 27, 1999.                                                                                                                              
|               | 
|10.6*          |  | Amendment No. 5 to SciQuest Stock Option Plan.                                                                                                                                                          
|               | 
|10.7*          |  | SciQuest1999 Stock Incentive Plan dated as of October 12, 1999.                                                                                                                                         
|               | 
|10.8**         |  | First Amendment to 1999 Stock Incentive Plan.                                                                                                                                                           
|               | 
|10.9**         |  | Agreement and Plan of Merger and Reorganization between SciQuest, ESP Acquisition, Inc. and EMAX Solution Partners, Inc. dated March 13, 2000.                                                          
|               | 
|10.10**        |  | SciQuest 2000 Employee Stock Purchase Plan.                                                                                                                                                             
|               | 
|10.11***       |  | Second Amendment to 1999 Stock Incentive Plan.                                                                                                                                                          
|               | 
|10.12****      |  | Form of Services Agreement.                                                                                                                                                                             
|               | 
|10.13*****     |  | Form of Master License and Services Agreement.                                                                                                                                                          
|               | 
|10.14*****     |  | Executive Employment Agreement by and between SciQuest and Stephen J. Wiehe, dated February 5, 2002.                                                                                                    
|               | 
|10.15******    |  | Agreement and Plan of Merger, dated as of June 25, 2002, by and among SciQuest, HigherMarkets Acquisition, Inc. and HigherMarkets, Inc.                                                                 
|               | 
|10.16*         |  | Lease Agreement by and between Duke-Weeks Realty Limited Partnership and SciQuest dated as of October 19, 1999.                                                                                         
|               | 
|10.17*******   |  | Lease Agreement by and between Brandywine Operating Partnership, L.P. and SciQuest dated as of October 2000.                                                                                            
|               | 
|10.18+         |  | Change of Control Agreement by and between Stephen J. Wiehe and SciQuest dated as of January 1, 2004.                                                                                                   



34



---

##### Table of Contents

|              |  |                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                            
|10.19+        |  | Change of Control Agreement by and between James B. Duke and SciQuest dated as of January 1, 2004.                     
|              | 
|10.20+        |  | Change of Control Agreement by and between Kerry S. May and SciQuest dated as of January 1, 2004.                      
|              | 
|10.21+        |  | Change of Control Agreement by and between Suzanne Miglucci and SciQuest dated as of January 1, 2004.                  
|              | 
|10.22++       |  | Agreement and Plan of Merger, dated as of April 10, 2004, among Trinity Tarheel Acquisition, LLC,                      
|              | 
|31.1          |  | Certificate of Chief Executive Officer                                                                                 
|              | 
|31.2          |  | Certificate of Principal Financial Officer                                                                             
|              | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Incorporated by reference to SciQuests Registration Statement on Form S-1 (Reg. No. 333-87433).
|- | ------------------------------------------------------------------------------------------------

|** | Incorporated by reference to SciQuests Registration Statement on Form S-1 (Reg. No. 333-32582).
|-- | ------------------------------------------------------------------------------------------------

|*** | Incorporated by reference to SciQuests Annual Report on Form 10-K for the year ended December 31, 2000.
|--- | --------------------------------------------------------------------------------------------------------

|**** | Incorporated by reference to SciQuests Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
|---- | ----------------------------------------------------------------------------------------------------------

|***** | Incorporated by reference to SciQuests Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
|----- | -----------------------------------------------------------------------------------------------------------

|****** | Incorporated by reference to SciQuests Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
|------ | ----------------------------------------------------------------------------------------------------------

|******* | Incorporated by reference to SciQuests Annual Report on Form 10-K for the year ended December 31, 2002.
|------- | --------------------------------------------------------------------------------------------------------

|******** | Incorporated by reference to SciQuests Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
|-------- | ----------------------------------------------------------------------------------------------------------

|********* | Incorporated by reference to SciQuests Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
|--------- | ---------------------------------------------------------------------------------------------------------------

|+ | Incorporated by reference to SciQuests Annual Report on Form 10-K for the year ended December 31, 2003.
|- | --------------------------------------------------------------------------------------------------------

|++ | Incorporated by reference to SciQuests Report on Form 8-K, dated April 12, 2004.
|-- | ---------------------------------------------------------------------------------



(b) Reports on Form 8-K.



A current report on Form 8-K was filed on February 6, 2004, in connection with the release of SciQuests earnings for the quarter ended December 31,
2003.



35



---

##### Table of Contents

SIGNATURES



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



|                   |  |                |  |     |  |                                             
|------------------ |  | -------------- |  | --- |  | --------------------------------------------
|                   |  | SCIQUEST, INC.
|                   |  |                | 
|Date: May 13, 2004 |  |                |  | By: |  | /s/ Stephen J. Wiehe                        
|                   |  |                |  |     |  | Stephen J. Wiehe                            
|                   |  |                |  |     |  | Chief Executive Officer                     
|                   |  |                |  |     |  | (Principal Executive Officer)               
|                   |  |                | 
|Date: May 13, 2004 |  |                |  | By: |  | /s/ David R. Poucher                        
|                   |  |                |  |     |  | David R. Poucher                            
|                   |  |                |  |     |  | Principal Financial Officer                 
|                   |  |                |  |     |  | (Principal Financial and Accounting Officer)



36