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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



[Mark
One]

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



For the quarterly period ended September 30, 2003



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



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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)



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No ̈



Indicate 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 November 6, 2003,
3,746,819 shares of Common Stock, $.001 par value, were outstanding.



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##### Table of Contents

SCIQUEST, INC.



TABLE OF CONTENTS



|PART I  FINANCIAL INFORMATION:                                                             
|--------------------------------------------------------------------------------------------
|                                                                                            
|ITEM 1: FINANCIAL STATEMENTS                                                                
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
|                                                                                            
|ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                                                            
|PART II  OTHER INFORMATION:                                                                
|                                                                                            
|ITEM 1: LEGAL PROCEEDINGS                                                                   
|                                                                                            
|ITEM 2: CHANGES IN SECURITIES                                                               
|                                                                                            
|ITEM 3: DEFAULTS IN SECURITIES                                                              
|                                                                                            
|ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|                                                                                            
|ITEM 5: OTHER INFORMATION                                                                   
|                                                                                            
|ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                    
|                                                                                            
|SIGNATURES                                                                                  
|                                                                                            
|CERTIFICATIONS                                                                              



2



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##### Table of Contents

PART I



|Item 1. |  | Financial Statements
|------- |  | --------------------



SciQuest, Inc.



CONSOLIDATED
BALANCE SHEETS



|                                                                                                                                                                |  | September 30, 2003 |              |   | December 31, 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------------ | - | ----------------- | -
|                                                                                                                                                                |  | (unaudited)        |              |   |                   |  
|Assets                                                                                                                                                          |  |                    |              |   |                   |  
|Current assets:                                                                                                                                                 |  |                    |              |   |                   |  
|Cash and cash equivalents                                                                                                                                       |  | $                  | 14,231,468   |   |                   | $
|Short-term investments                                                                                                                                          |  |                    | 3,277,771    |   |                   |  
|Accounts receivable, net                                                                                                                                        |  |                    | 917,846      |   |                   |  
|Prepaid expenses and other current assets                                                                                                                       |  |                    | 2,096,319    |   |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Total current assets                                                                                                                                            |  |                    | 20,523,404   |   |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Long-term investments                                                                                                                                           |  |                    | 3,889,000    |   |                   |  
|Property and equipment, net                                                                                                                                     |  |                    | 1,407,529    |   |                   |  
|Capitalized software and web site development costs, net                                                                                                        |  |                    | 6,241,317    |   |                   |  
|Other intangible assets, net                                                                                                                                    |  |                    | 201,128      |   |                   |  
|Other long-term assets                                                                                                                                          |  |                    | 514,593      |   |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Total assets                                                                                                                                                    |  | $                  | 32,776,971   |   |                   | $
|                                                                                                                                                                |  |                    |              |   |                   |  
|Liabilities and Stockholders Equity                                                                                                                            |  |                    |              |   |                   |  
|Current liabilities:                                                                                                                                            |  |                    |              |   |                   |  
|Accounts payable                                                                                                                                                |  | $                  | 396,990      |   |                   | $
|Accrued liabilities                                                                                                                                             |  |                    | 4,993,181    |   |                   |  
|Deferred revenue                                                                                                                                                |  |                    | 3,070,113    |   |                   |  
|Current maturities of long-term debt and capital lease obligations                                                                                              |  |                    |             |   |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Total current liabilities                                                                                                                                       |  |                    | 8,460,284    |   |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Long-term debt and capital lease obligations, less current maturities                                                                                           |  |                    | 1,562,833    |   |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Commitments and contingencies                                                                                                                                   |  |                    |              |   |                   |  
|Stockholders equity:                                                                                                                                           |  |                    |              |   |                   |  
|Common stock, $0.001 par value; 90,000,000 shares authorized;3,993,216 and 4,116,629 shares issued as of September 30, 2003
and December 31, 2002, respectively |  |                    | 3,993        |   |                   |  
|Additional paid-in capital                                                                                                                                      |  |                    | 314,060,461  |   |                   |  
|Deferred compensation                                                                                                                                           |  |                    |             |   |                   |  
|Deferred customer acquisition costs                                                                                                                             |  |                    | (684         | ) |                   |  
|Accumulated other comprehensive loss                                                                                                                            |  |                    |             |   |                   |  
|Treasury stock, at cost; 253,911 and 96,987 shares as of September 30, 2003 and December 31, 2002, respectively                                                 |  |                    | (1,258,948   | ) |                   |  
|Accumulated deficit                                                                                                                                             |  |                    | (290,050,968 | ) |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Total stockholders equity                                                                                                                                      |  |                    | 22,753,854   |   |                   |  
|                                                                                                                                                                |  |                    |              |   |                   |  
|Total liabilities and stockholders equity                                                                                                                      |  | $                  | 32,776,971   |   |                   | $
|                                                                                                                                                                |  |                    |              |   |                   |  



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



3



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##### Table of Contents

SciQuest, Inc.



CONSOLIDATED
STATEMENTS OF OPERATIONS

(unaudited)



|                                                                                                         |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | -
|                                                                                                         |  | 2003                             |            |   | 2002                            |  
|Revenues:                                                                                                |  |                                  |            |   |                                 |  
|License fees and other professional services                                                             |  | $                                | 1,491,428  |   |                                 | $
|                                                                                                         |  |                                  |            |   |                                 |  
|Cost of revenues:                                                                                        |  |                                  |            |   |                                 |  
|Cost of license fees and other professional services                                                     |  |                                  | 545,927    |   |                                 |  
|Cost of license fees-amortization of acquired and capitalized software costs                             |  |                                  | 623,152    |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Total cost of revenues                                                                                   |  |                                  | 1,169,079  |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Gross profit (loss)                                                                                      |  |                                  | 322,349    |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Operating expenses:                                                                                      |  |                                  |            |   |                                 |  
|Development                                                                                              |  |                                  | 1,146,994  |   |                                 |  
|Non-cash stock-based employee compensation                                                               |  |                                  |           |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Total development expenses                                                                               |  |                                  | 1,146,994  |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Sales and marketing                                                                                      |  |                                  | 1,003,774  |   |                                 |  
|Non-cash stock-based employee compensation and customer acquisition expense (benefit)                    |  |                                  | 6,215      |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Total sales and marketing expenses                                                                       |  |                                  | 1,009,989  |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|General and administrative                                                                               |  |                                  | 1,477,135  |   |                                 |  
|Non-cash stock-based employee compensation and amortization of intangibles                               |  |                                  | 18,285     |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Total general and administrative expenses                                                                |  |                                  | 1,495,420  |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Restructuring                                                                                            |  |                                  | 140,000    |   |                                 |  
|Impairment of intangible assets                                                                          |  |                                  |           |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Total operating expenses                                                                                 |  |                                  | 3,792,403  |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Operating loss                                                                                           |  |                                  | (3,470,054 | ) |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Other income (expense):                                                                                  |  |                                  |            |   |                                 |  
|Interest income                                                                                          |  |                                  | 108,529    |   |                                 |  
|Interest expense                                                                                         |  |                                  | (19,935    | ) |                                 |  
|Other income, net                                                                                        |  |                                  | (8,760     | ) |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Total other income, net                                                                                  |  |                                  | 79,834     |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Loss from continuing operations before cumulative effect of accounting change for impairment of goodwill |  |                                  | (3,390,220 | ) |                                 |  
|Loss from discontinued operations (including loss on disposal of $247,417 on May 31, 2003)               |  |                                  |           |   |                                 |  
|Cumulative effect of accounting change for impairment of goodwill                                        |  |                                  |           |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Net loss                                                                                                 |  | $                                | (3,390,220 | ) |                                 | $
|                                                                                                         |  |                                  |            |   |                                 |  
|Net loss per common sharebasic and diluted:                                                             |  |                                  |            |   |                                 |  
|From continuing operations before cumulative effect of accounting change                                 |  | $                                | (0.90      | ) |                                 | $
|Loss from discontinued operations (including $0.06 from loss on disposal on May 31, 2003)                |  |                                  |           |   |                                 |  
|Cumulative effect of accounting change                                                                   |  |                                  |           |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  
|Net loss per share-basic and diluted                                                                     |  | $                                | (0.90      | ) |                                 | $
|                                                                                                         |  |                                  |            |   |                                 |  
|Weighted average common shares outstandingbasic and diluted                                             |  |                                  | 3,750,156  |   |                                 |  
|                                                                                                         |  |                                  |            |   |                                 |  



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



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##### Table of Contents

SciQuest, Inc.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                            |  | Nine Months Ended September 30, |            
|--------------------------------------------------------------------------- |  | ------------------------------- | -----------
|                                                                            |  | 2003                            |            
|Cash flows from operating activities                                        |  |                                 |            
|Net loss                                                                    |  | $                               | (13,444,924
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |            
|Depreciation and amortization                                               |  |                                 | 4,243,250  
|Bad debt expense                                                            |  |                                 | 50,000     
|Loss on disposal from discontinued operations                               |  |                                 | 247,417    
|Non-cash disposal of product lines                                          |  |                                 | (157,491   
|Non-cash buyer incentive warrants                                           |  |                                 |           
|Accounting change-impairment of goodwill                                    |  |                                 |           
|Impairment of intangible assets                                             |  |                                 |           
|Amortization of deferred compensation                                       |  |                                 | 78,869     
|Amortization of deferred customer acquisition costs                         |  |                                 | 12,585     
|Amortization of discount on investments                                     |  |                                 | 109,567    
|Loss from disposal of fixed assets                                          |  |                                 | 127,579    
|Asset write downs and other charges of restructuring                        |  |                                 | 41,027     
|Changes in operating assets and liabilities:                                |  |                                 |            
|Accounts receivable                                                         |  |                                 | 1,326,056  
|Prepaid expenses and other current assets                                   |  |                                 | 912,446    
|Other assets                                                                |  |                                 | (304,632   
|Accounts payable                                                            |  |                                 | (9,840     
|Accrued liabilities                                                         |  |                                 | (748,976   
|Deferred revenue                                                            |  |                                 | 448,669    
|                                                                            |  |                                 |            
|Net cash used in operating activities                                       |  |                                 | (7,068,398 
|                                                                            |  |                                 |            
|Cash flows from investing activities                                        |  |                                 |            
|Purchase of property and equipment and capitalized software                 |  |                                 | (1,646,795 
|Proceeds from sale of equipment                                             |  |                                 | 4,393      
|Cash received from acquisitions                                             |  |                                 |           
|Cash paid for acquisitions                                                  |  |                                 |           
|Maturity of investments                                                     |  |                                 | 17,650,649 
|Purchase of investments, including restricted cash                          |  |                                 | (5,230,888 
|                                                                            |  |                                 |            
|Net cash provided by (used in) investing activities                         |  |                                 | 10,777,359 
|                                                                            |  |                                 |            
|Cash flows from financing activities                                        |  |                                 |            
|Repayment of notes payable                                                  |  |                                 | (300,000   
|Repayment of capital lease obligations                                      |  |                                 | (44,721    
|Proceeds from exercise of common stock warrants and options                 |  |                                 | 645        
|Proceeds from issuance of common stock under employee stock purchase plan   |  |                                 | 16,740     
|Purchase and retirement of fractional shares from reverse stock split       |  |                                 | (1,340     
|Purchase of treasury stock                                                  |  |                                 | (618,375   
|                                                                            |  |                                 |            
|Net cash used in financing activities                                       |  |                                 | (947,051   
|                                                                            |  |                                 |            
|Effect of exchange rate changes on cash and cash equivalents                |  |                                 | 9,405      
|                                                                            |  |                                 |            
|Net increase (decrease) in cash and cash equivalents                        |  |                                 | 2,771,315  
|Cash and cash equivalents at beginning of period                            |  |                                 | 11,460,153 
|                                                                            |  |                                 |            
|Cash and cash equivalents at end of period                                  |  | $                               | 14,231,468 
|                                                                            |  |                                 |            



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



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##### 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 technology, services and domain expertise to
optimize procurement and materials management for the life sciences and higher education markets. SciQuest solutions enable research-intensive organizations to reduce costs, improve quality and speed the process of innovation by helping them find
and acquire resources and manage the lifecycle of critical assets.



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.



Prior to 2002, the Company earned revenues from e-commerce transactions generated by purchases made through the SciQuest web sites. Effective May 1, 2001, the Company ceased taking title to products sold through its
e-commerce solution. Therefore, there is no revenue from e-commerce transactions in 2002 and 2003.



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 $290 million at September 30, 2003, incurred a net loss of $3.4 million for the quarter then
ended, and expects to incur additional losses during the remainder of 2003.



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 September 30, 2003, the Company had total cash and
investments of $21.4 million, which is comprised of cash and cash equivalents of $14.2 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, one customer generated 17% of the Companys revenue
for the three months ended September 30, 2003, 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.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Based on average quarterly operating expenses (excluding non-cash expenses) incurred in the seven
quarters after the June 2001 restructuring and budgeted expenditures for 2003, the Company believes cash and investments at September 30, 2003 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 and nine months ended September 30, 2003 and 2002 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, 2002 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, 2002 included in the Companys Form 10-K, filed with the SEC on March 17, 2003. The results of
operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.



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



During the second quarter of 2003, the
Company reorganized its corporate structure dissolving SciQuest Europe, Limited, and sold Textco, Inc., a wholly-owned subsidiary. As of September 30, 2003, the consolidated financial statements include the accounts of SciQuest, Inc. and its
wholly-owned subsidiary, HigherMarkets, Inc. (HigherMarkets). All significant intercompany accounts and transactions have been eliminated. 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. (HigherMarkets). 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 purchases 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.



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##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



Restricted Cash



At September 30, 2003, 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 $207,000 and $332,000 at September 30, 2003 and December 31, 2002, 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 Solution Partners, Inc., Textco, Groton NeoChem and HigherMarkets (see Note
3) 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 (see Note 7).



8



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##### 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 September 30, 2003 and December 31, 2002 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, 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 (asset group) exceeds its fair value.



In
March 2000, the Company acquired all of the outstanding common and preferred stock of EMAX Solution Partners, Inc. (EMAX) and allocated $22,000,000 of the purchase price to trademarks. Subsequently, the value of the trademarks was being amortized to
expense over a three-year period. During the first quarter of 2002, the Company discontinued utilizing the EMAX trademarks and, accordingly, determined that the carrying value of the trademarks had been impaired. As a result, the Company recognized
a charge to income of $7,155,914, the unamortized balance at March 31, 2002, ($1.84 per share) in the first quarter of 2002 (see Note 7).



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. In accordance with the transitional provisions of SFAS No. 142, the Company determined that the carrying value of goodwill and
related assets exceeded their fair value. As a result, the Company recognized a charge to income of $38,257,357 ($9.85 per share), as the cumulative effect of a change in accounting principle during the first quarter of 2002 (see Note 7).



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 solutions 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



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.



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 solutions 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 5).



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.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



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.



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 and nine months ended September 30, 2003 and 2002 would have been increased to the pro forma amounts indicated
below:



|                                                                                                                                            |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | -
|                                                                                                                                            |  | 2003                             |            |   | 2002                            |  
|Net loss available to common stockholders:                                                                                                  |  |                                  |            |   |                                 |  
|As reported                                                                                                                                 |  | $                                | (3,390,220 | ) |                                 | $
|Add: Stock-based employee compensation expense included in reported net loss, net of tax related effects                                    |  |                                  |           |   |                                 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects |  |                                  | (217,593   | ) |                                 |  
|                                                                                                                                            |  |                                  |            |   |                                 |  
|SFAS 123 proforma                                                                                                                           |  | $                                | (3,607,813 | ) |                                 | $
|                                                                                                                                            |  |                                  |            |   |                                 |  
|Loss per sharebasic and diluted:                                                                                                           |  |                                  |            |   |                                 |  
|As reported                                                                                                                                 |  | $                                | (0.90      | ) |                                 | $
|                                                                                                                                            |  |                                  |            |   |                                 |  
|SFAS 123 proforma                                                                                                                           |  | $                                | (0.96      | ) |                                 | $
|                                                                                                                                            |  |                                  |            |   |                                 |  



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 September 30, 2003 and 2002 and the nine months ended September
30, 2003 and 2002, respectively: risk free interest of 3.1%, 3.4%, 2.9% and 4.1%; expected lives of five years; dividend yields of 0%; and volatility factors of 119%, 130%, 119% and 130%.



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 September 30, 2003, one customer comprised 17%
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
September 30, 2003, two customers comprised 17% and 14%, 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 during the three and nine months ended September 30, 2003 and 2002 was foreign currency
translation.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



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.



Net Income (Loss) Per Common Share



Basic net income (loss) per common share 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 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 and nine months ended September 30, 2003 and 2002 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 September 30, 2003, 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 June 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF No. 94-3). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is incurred. This is in contrast to EITF 94-3 that required recognition of a liability upon an entitys commitment to an exit plan. SFAS No. 146 concludes that a
commitment, by itself, does not create a present obligation meeting the definition of a liability. This statement establishes fair value as the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have any material impact on the Companys financial statements or results of operations.



In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Series FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersan interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34 (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. The interpretive guidance incorporated without change from Interpretation 34 continues to be required for financial statements for fiscal years ending after June 15, 1981the effective date of
Interpretation 34. The adoption of FIN No. 45 did not have any impact on the Companys financial statements or results of operations. The required disclosures as of September 30, 2003 are presented in Note 8.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement No. 123 (SFAS No. 148) which amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based employee compensation. SFAS No. 148 amends Accounting Principles Board Opinion No. 28,
Interim Financial Reporting, to require prominent disclosure in interim financial information. The provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002 with the interim
reporting provisions effective for reporting periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have any material impact on the Companys financial statements or results of operations since the Company continues to
utilize the provisions of Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, rather than voluntarily change to the fair value based method. The required disclosures as of September 30, 2003 are presented
in Note 2.



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 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.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



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. On 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. | Acquisitions
|-- | ------------



Textco, Inc



On February 19, 2002, the Company purchased all of the outstanding stock of Textco, Inc. in exchange for the issuance of 29,165 shares of the
Companys common stock with a value of approximately $329,000 based on the average market price over the five-day period beginning two days before and ending two days after the acquisition date, cash payments in the amount of $393,000
(including $118,000 for acquisition-related expenses) and the assumption of $37,000 in net liabilities of Textco. This acquisition was accounted for using the purchase method of accounting under SFAS No. 141. The results of Textcos operations
have been included in the consolidated financial statements since the date of acquisition.



The merger agreement includes incentive payments upon achievement of cumulative revenue targets during the first year. Cash of $180,000 and 35,895 shares of common stock related to the incentive payments were placed
in escrow. Since the cumulative revenue targets were achieved during 2002, the escrowed incentive payments have been paid, with the stock valued at $121,000. The additional $301,000 of purchase price was allocated to the developed software costs.



Of the total purchase price, $911,000 was allocated to the
developed software costs and $106,000 was allocated to non-competition agreements. These assets are being amortized over a period of two to three years. An insignificant amount of purchase price was allocated to the tangible assets.



The purchase of Textco expanded SciQuests software product offerings
into the early stages of drug discovery research via biological research software.



Effective May 31, 2003, the Company divested of its investment in Textco (see Note 9).



Groton NeoChem



On March 18, 2002, the Company purchased substantially all of the assets of Groton NeoChem for cash payments in the amount of $423,000 (including $123,000
for acquisition-related expenses) and the assumption of $26,000 in net liabilities. This acquisition was accounted for using the purchase method of accounting under SFAS No. 141. The results of Groton NeoChems operations have been included in
the consolidated financial statements since the date of acquisition.



The entire purchase price, approximately $449,000, was allocated to developed software costs, which are being amortized over the estimated useful life of the software, which is three years.



The Groton NeoChem solutions facilitate the capture, organization,
management, analysis and presentation of data by integrating advanced software and analytical instrument technology.



Effective September 30, 2003, the Company divested of its investment in the Groton NeoChem assets (see Note 9).



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



HigherMarkets, Inc



On June 25, 2002, the Company purchased all of the outstanding stock of HigherMarkets, Inc. in exchange for the issuance of
86,957 shares of the Companys common stock with a value of approximately $480,000 based on the average market price over the five-day period beginning two days before and ending two days after the acquisition date, cash payments of
acquisition-related expenses of $42,000 and the assumption of $147,000 in net liabilities of HigherMarkets. This acquisition was accounted for using the purchase method of accounting under SFAS No. 141. The results of HigherMarkets operations
have been included in the consolidated financial statements since the date of acquisition.



Of the total purchase price, $50,000 was allocated to fixed assets, $203,000 to the developed software costs and $293,000 to customer agreements. These assets are being amortized over a period of two to four years. In
addition, approximately $95,000 of the total purchase price was allocated to cash and investments leaving $28,000 allocated to various current assets.



The purchase of HigherMarkets expands SciQuests software product offerings into the higher education marketplace via the HigherMarkets hosted
procurement solutions designed to meet the unique needs of this industry. The HigherMarkets products are used by requisitioners and procurement departments of universities, colleges, research institutions and other post-secondary educational
entities.



|4. | Restructuring
|-- | -------------



In June 2001, the Company announced a restructuring of the business to eliminate e-commerce transaction processing 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 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.



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



|                                         |  | Liability at December 31, 2002 |           | AdditionalRestructuring Expenses |   | Impairment Expenses and Charges to Liability |  | Remaining Liability at September 30, 2003
|---------------------------------------- |  | ------------------------------ | --------- | -------------------------------- | - | -------------------------------------------- |  | -----------------------------------------
|Number of employees                      |  |                                |          |                                  |   | 36                                           |  |                                          
|                                         |  |                                |           |                                  |   |                                              |  |                                          
|Involuntary termination benefits         |  | $                              |          |                                  | $ | 380,000                                      |  | $                                        
|Other costs, primarily lease obligations |  |                                | 3,669,983 |                                  |   | 790,000                                      |  |                                          
|                                         |  |                                |           |                                  |   |                                              |  |                                          
|Total                                    |  | $                              | 3,669,983 |                                  | $ | 1,170,000                                    |  | $                                        
|                                         |  |                                |           |                                  |   |                                              |  |                                          



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|5. | 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 September 30, 2003.
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
September 30, 2003 and December 31, 2002, the Company had deferred customer acquisition costs of $3,263,455 and $3,255,394, respectively, with accumulated amortization of $3,262,771 and $3,250,186, respectively, resulting in net costs of $684 and
$5,208, 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 $6,215 and $12,585 in stock-based non-cash customer acquisition expense (benefit) during the three and nine months ended September 30, 2003, respectively, and $33,214 and
$(369,052) during the three and nine months ended September 30, 2002, respectively, related to the amortization of deferred customer acquisition costs.



|6. | 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.



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 alleges breach by the Company of an agreement pursuant to which the Company was to upgrade the software to a newer version. The complaint seeks damages alleged to exceed $1,000,000. The
litigation arises 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 intends to vigorously defend the action and has asserted its counterclaims seeking damages in excess of $2,000,000 for copyright infringement and breach of contract and to recover the
amounts due for work previously billed, but unpaid.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



It is too early in each 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.



|7. | Goodwill and Other Intangible Assets
|-- | ------------------------------------



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. In accordance with the transitional provisions of SFAS No. 142, the Company determined that the carrying value of goodwill and
related assets exceeded their fair value. As a result, the Company recognized a charge to income of $38,257,357 ($9.85 per share) of goodwill impairment as the cumulative effect of a change in accounting principle during the first quarter of 2002.
As of the end of each period presented, all of the Companys intangible assets had definitive lives and were being amortized accordingly.



In March 2000, the Company acquired all of the outstanding common and preferred stock of EMAX Solution Partners, Inc. (EMAX) and allocated $22,000,000 of
the purchase price to trademarks. Subsequently, the value of the trademarks was being amortized to expense over a three-year period. During the first quarter of 2002, the Company discontinued utilizing the EMAX trademarks, and accordingly,
determined that the carrying value of the trademarks had been impaired. As a result, the Company recognized a charge to income of $7,155,914, the unamortized balance at March 31, 2002, ($1.84 per share) in the first quarter of 2002.



|8. | 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.



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 will 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 by a majority of the Companys disinterested directors.



|9. | 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 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 and nine
months ended September 30, 2003 and 2002.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|                                                 |  | Three Months Ended September 30, |   |      |   |          | Nine Months Ended September 30, | 
|------------------------------------------------ |  | -------------------------------- | - | ---- | - | -------- | ------------------------------- | 
|                                                 |  | 2003                             |   | 2002 |   |          |                                 | 
|Revenue                                          |  | $                                |  |      | $ | 133,155  |                                 | 
|Gross profit                                     |  | $                                |  |      | $ | 49,944   |                                 | 
|Operating expenses                               |  | $                                |  |      | $ | 177,720  |                                 | 
|Income (loss) from operations                    |  | $                                |  |      | $ | (127,776 | )                               | 
|Loss on disposal                                 |  |                                  |  |      |   |         |                                 | 
|                                                 |  |                                  |   |      |   |          |                                 | 
|Total income (loss) from discontinued operations |  | $                                |  |      | $ | (127,776 | )                               | 
|                                                 |  |                                  |   |      |   |          |                                 | 



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.



|10. | 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.



|11. | Notes Payable
|--- | -------------



During September 2003, the Company negotiated a modification and extension of its revolving line of credit with an increased commitment amount of $3.5
million. The line, which has a balance of $1,562,833 at September 30, 2003, is due on January 3, 2006. Interest is payable monthly at the lenders prime rate (4.0% at September 30, 2003). The loan commitment is collateralized with restricted
investments in the amount of $3,889,000 at September 30, 2003. The funds are available for working capital uses and no other significant conditions are applicable.



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|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:



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



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



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



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



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



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



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



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



| |  | the effects of the application of, and changes in, our accounting policies;
| | - | ---------------------------------------------------------------------------



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



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



| |  | our international sales efforts;
| | - | --------------------------------



| |  | the effects of our cost reductions and restructuring program;
| | - | -------------------------------------------------------------



| |  | future sales of stock by our executive officers; and
| | - | ----------------------------------------------------



| |  | the sufficiency 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.



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Overview



We provide technology, services and domain expertise to optimize procurement and materials management for the life sciences and higher education markets.
SciQuest solutions enable research-intensive organizations to reduce costs, improve the quality and the speed of the process of innovation by helping them find and acquire resources and manage the lifecycle of critical assets.



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 discontinued 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 the first quarter of 2003 we refocused our expenditures to support our procurement and materials management platform. As
a result, we are reducing costs in other areas. These cost reductions resulted in the elimination of approximately 50 full-time positions during the first six months of 2003. 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.



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.



We
sell subscriptions to our hosted e-procurement solutions 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 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.



We also generate 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. 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, 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.



Recent Acquisitions



Textco, Inc.



On February 19, 2002, we purchased all of the outstanding stock of Textco, Inc. in exchange for the issuance of 29,165 shares of our common stock with a
value of approximately $329,000 based on the average market price over the five-day



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period beginning two days before and ending two days after the acquisition date, cash payments in the amount of $393,000
(including $118,000 for acquisition-related expenses) and the assumption of $37,000 in net liabilities of Textco. This acquisition was accounted for using the purchase method of accounting. The results of Textcos operations have been included
in the consolidated financial statements since the date of acquisition.



The acquisition agreement includes incentive payments upon achievement of cumulative revenue targets during the first year. Cash of $180,000 and 35,895 shares of common stock related to the incentive payments were placed in escrow. Since
the cumulative revenue targets were achieved during 2002, the escrowed incentive payments have been paid, with the stock valued at $121,000. The additional $301,000 of purchase price was allocated to the developed software technology.



Of the total purchase price, $911,000 was allocated to the developed software
technology and $106,000 was allocated to non-competition agreements. These assets were amortized over a period of two to three years. An insignificant amount of purchase price was allocated to the tangible assets.



The purchase of Textco expanded our software product offerings into the early
stages of drug discovery research via biological research software.



Effective May 31, 2003, we sold all of the outstanding shares of Textco to its original owners in exchange for all of the 65,060 shares of SciQuest common stock that were issued as part of the original 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.



Groton Neochem.



On March 18, 2002, we purchased substantially all of the assets of Groton NeoChem for cash payments in the amount of $423,000 (including $123,000 for
acquisition-related expenses) and the assumption of $26,000 in net liabilities. This acquisition was accounted for using the purchase method of accounting. The results of Groton NeoChems operations have been included in the consolidated
financial statements since the date of acquisition.



The entire
purchase price, approximately $449,000, was allocated to developed software technology, which is being amortized over the estimated useful life of the software, which is three years.



The Groton NeoChem solutions facilitate the capture, organization, management, analysis and presentation of data by
integrating advanced software and analytical instrument technology.



Effective September 30, 2003, we divested our interest in the NeoChem Groton assets.



HigherMarkets, Inc.



On June 25, 2002, we purchased all of the outstanding stock of HigherMarkets, Inc. in exchange for the issuance of 86,957 shares of our common stock with a value of approximately $480,000 based on the average market price over the
five-day period beginning two days before and ending two days after the acquisition date, cash payments of acquisition-related expenses of $42,000 and the assumption of $147,000 in net liabilities of HigherMarkets. This acquisition was accounted for
using the purchase method of accounting. The results of HigherMarkets operations have been included in the consolidated financial statements since the date of acquisition.



Of the total purchase price, $50,000 was allocated to fixed assets, $203,000 to the developed software technology and
$293,000 to customer agreements. These assets are being amortized over a period of two to four years. In addition, approximately $95,000 of the total purchase price was allocated to cash and investments leaving $28,000 allocated to various current
assets.



The purchase of HigherMarkets expanded our software
product offerings into the higher education marketplace via the HigherMarkets hosted procurement solutions. The HigherMarkets products are used by requisitioners and procurement departments of universities, colleges, research institutions and other
post-secondary educational entities.



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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.



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 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.



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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 September 30, 2003 represents approximately 18% 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.



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 Notes 2 and 7 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.



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. In accordance with
the transitional provisions of SFAS No. 142, we determined that the carrying value of goodwill and related assets exceeded their fair value. As a result, we recognized a charge to income of $38,257,357 ($9.85 per share), as the cumulative effect of
a change in accounting principle during the first quarter of 2002. 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 is measured as the amount by which the carrying amount of a long-lived asset (or asset group) exceeds its fair
value.



In March 2000, we acquired all of the outstanding
common and preferred stock of EMAX Solution Partners, Inc. and allocated $22,000,000 of the purchase price to trademarks. Subsequently, the value of the trademarks was being amortized to expense over a three-year period. During the first quarter of
2002, we discontinued utilizing the EMAX trademarks, and accordingly, determined that the carrying value of the trademarks had been impaired. As a result, we recognized a charge to income of $7,155,914, the unamortized balance at March 31, 2002,
($1.84 per share) in the first quarter of 2002.



Restructuring. We have previously announced two 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.



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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.



Internal
Controls



Our Chief Executive Officer and Chief Financial
Officer have reviewed our companys disclosure controls and procedures as of the end of the quarter ended September 30, 2003 (the Evaluation Date). 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 September 30, 2003 and 2002



Revenues



Revenues for the three months ended September 30, 2003 and 2002 have been derived primarily from the sale of licenses of our software products, the
implementation and customization of our software products and from the subscriptions to our hosted e-procurement and materials management solutions.



During the three months ended September 30, 2003 and 2002, we recognized $1.5 million and $1.5 million, respectively, of revenue from fees from licenses
and other professional services.



During the three months ended
September 30, 2003, one customer accounted for 17% 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
September 30, 2003 and 2002 was $1.2 million and $1.9 million, respectively, of which $0.6 million and $1.2 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 September 30, 2003, decreased primarily due to reduced amortization of acquired and capitalized software development costs.



Gross Profit



Gross profit increased to $0.3 million for the three months ended September
30, 2003 from $(0.3) million for the three months ended September 30, 2002. 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 relating to technology added from recent acquisitions and our Enterprise Substance Manager software to $0.6 million from $1.2 million.



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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 costs decreased to $1.1 million for the three months ended September 30, 2003 from $2.2 million for the three months ended September 30, 2002. In 2002 and 2003, we began refocusing our development
expenditures to our procurement and materials management platform. As a result, this decrease is attributable to the reduction in development expenses in areas other than our procurement and materials management platform. During the three months
ended September 30, 2003 and 2002, we capitalized approximately $0.4 million and $0.5 million, respectively, of certain costs related to software and hosted application development projects.



Included in development costs is the amortization of non-cash stock-based
employee compensation expense, which totaled approximately $0 and $70,000 for the three months ended September 30, 2003 and 2002, 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 recent headcount reductions, resulting in reduced non-cash expense.



As a result of the recent reduction of personnel in the development departments, we expect our development expenses for the fourth quarter of 2003 to be lower than the fourth quarter of 2002.



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 $1.0
million for the three months ended September 30, 2003 from $1.2 million for the three months ended September 30, 2002. Expenses decreased as a result of reduced salary and program costs.



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 September 30, 2003 decreased to approximately $6,200 from $33,000 for the three months ended September 30, 2002 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 $(3,000) for the three months ended September 30, 2003 and 2002, 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 recent headcount reductions, resulting in reduced non-cash expense.



We expect our sales and marketing expenses to be somewhat lower in the fourth quarter of 2003 than in the fourth quarter of 2002 and the total for 2003
should be lower than the total for 2002.



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.



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Total general and administrative expenses decreased to $1.5 million for the three months ended September
30, 2003 from $2.0 million for the three months ended September 30, 2002. This decrease in general and administrative expenses is primarily the result of decreased operating and lease costs related to the recent restructuring and reduced
depreciation and amortization expense.



Included in general and
administrative expenses is the amortization of non-cash stock-based employee compensation expense, which totaled approximately $0 and $13,000 for the three months ended September 30, 2003 and 2002, 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 recent headcount reductions, 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 September 30, 2003 and 2002, respectively. This amortization of intangible assets relates to our recent acquisitions.



We expect general and administrative expenses for the fourth quarter of 2003 to be somewhat lower than the fourth quarter of 2002 as certain expenses were
eliminated as a result of the recent restructuring.



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. We completed this restructuring by the end of the
second quarter, and as a result, 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.



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) decreased to $0.1 million for the three months ended September 30, 2003 from
$0.2 million for the three months ended September 30, 2002. This decrease was primarily from reduced interest income resulting from our use of cash and investments to fund operations during the last twelve months as well as a reduction in interest
rates between the comparative periods. We expect net interest income to continue to be lower in 2003 than in 2002.



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 $128,000 during the three months ended September 30, 2002. Revenues and gross profit were approximately $133,000 and
$50,000 for the three months ended September 30, 2002. There was no loss on discontinued operations or adjustment to the previously recorded loss on the sale of the unit of approximately $247,000 during the three months ended September 30, 2003.



Nine Months Ended September 30, 2003 and 2002



Revenues



Revenues for the nine months ended September 30, 2003 and 2002 have been
derived primarily from the sale of licenses of our software products, the implementation and customization of our software products and from the subscriptions to our hosted e-procurement and materials management solutions.



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During the nine months ended September 30, 2003 and 2002, we recognized $5.0 million and $4.9 million,
respectively, of revenue from fees from licenses and other professional services. These amounts include revenue related to advertising sold in the BioSupplyNet Source Book of $230,000 and $410,000, respectively. Such revenue is recorded annually
when the Source Book is published. This decrease in the Source Book revenue is the result of lower levels of advertising sales due to reduced advertising budgets of the suppliers who normally purchase such advertising.



Revenue from fees from licenses and other professional services from
continuing operations for the nine months ended September 30, 2003, exclusive of the advertising revenue, increased to $4.8 million from $4.5 million for the nine months ended September 30, 2002.



During the nine months ended September 30, 2003, two customers accounted for
20% and 10%, respectively, of gross revenues. There can be no assurance that these customers will continue to purchase at these levels.



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 nine months ended
September 30, 2003 and 2002 was $4.5 million and $5.5 million, respectively, of which $2.4 million and $3.3 million, respectively, related to the amortization of acquired and capitalized software development costs. Also included in the cost of
revenue for license fees and other professional services are the costs related to the BioSupplyNet Source Book of $200,000 and $190,000, during the nine months ended September 30, 2003 and 2002, respectively.



Cost of revenues for licenses and other professional services from continuing
operations for the nine months ended September 30, 2003, exclusive of the cost of the Source Book revenue, decreased to $4.3 million from $5.3 million for the nine months ended September 30, 2002, primarily due to reduced amortization of acquired
and capitalized software development costs.



Gross Profit



Gross profit increased to $0.5 million for the nine
months ended September 30, 2003 from $(0.5) million for the nine months ended September 30, 2002. Gross profit from licenses and professional fees included gross profit from the BioSupplyNet Source Book of $30,000 and $220,000, during the nine
months ended September 30, 2003 and 2002, respectively. 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 relating
to technology added from recent acquisitions and our Enterprise Substance Manager software to $2.4 million for the nine months ended September 30, 2003 from $3.3 million for the nine months ended September 30, 2002.



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 costs decreased to $3.7 million for the nine months ended September 30, 2003 from $6.2 million for the nine months ended September 30, 2002.
In 2002 and 2003, we began refocusing our development expenditures to our procurement and materials management platform. As a result, this decrease is attributable to the reduction in development expenses in areas other than our procurement and
materials management platform. During the nine months ended September 30, 2003 and 2002, we capitalized approximately $1.6 million and $1.6 million, respectively, of certain costs related to software and hosted application development projects.



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Included in development cost is the amortization of non-cash stock-based employee compensation expense,
which totaled approximately $64,000 and $211,000 for the nine months ended September 30, 2003 and 2002, 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 recent
headcount reductions, resulting in reduced non-cash expense.



As a result of the recent reduction of personnel in the development departments, we expect our development expenses for the fourth quarter of 2003 to be lower than the fourth quarter of 2002.



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 increased to $3.2
million for the nine months ended September 30, 2003 from $2.9 million for the nine months ended September 30, 2002. This net increase resulted primarily from level operating expenses of $3.2 million offset by the $0.3 million credit during 2002
relating to customer acquisition costs as explained in the following paragraphs.



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 (benefit) for the nine months ended September 30, 2003 increased to
approximately $13,000 from $(370,000) for the nine months ended September 30, 2002 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 $40,000 for the nine months ended September 30, 2003 and 2002, 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 recent headcount
reductions, resulting in reduced non-cash expense.



We expect
our sales and marketing expenses to be somewhat lower in the fourth quarter of 2003 than in the fourth quarter of 2002 and the total for 2003 should be lower than the total for 2002.



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 $5.8 million for the
nine months ended September 30, 2003 from $7.6 million for the nine months ended September 30, 2002. The decrease in total general and administrative expenses of $1.8 million is comprised of level operating expenses of $5.7 million offset by a
decrease in the amortization of intangibles of $1.8 million.



Amortization of intangible assets decreased to approximately $55,000 from $1.8 million during the nine months ended September 30, 2003 and 2002, respectively. The 2002 amortization of $1.8 million related primarily to our March 2000
acquisition of EMAX Solutions. There was no amortization of intangible trademark assets during the nine months ended September 30, 2003 as a result of the discontinuance of the EMAX trademarks as discussed in Note 7 of the Consolidated Financial
Statements.



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Also included in general and administrative expenses is the amortization of non-cash stock-based employee
compensation expense, which totaled $16,000 and $39,000 for the nine months ended September 30, 2003 and 2002, 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 recent
headcount reductions, resulting in reduced non-cash expense.



We expect general and administrative expenses for the full year, exclusive of amortization, to be lower for 2003 than in 2002.



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. We completed this restructuring by the end of the second quarter, and 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.



Impairment of Other Intangible Assets. 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 its net book value exceeds fair value. The
impairment amount is measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.



In March 2000, we acquired all of the outstanding common and preferred stock of EMAX and allocated $22,000,000 of the purchase price to trademarks.
Subsequently, we were amortizing the value of the trademarks to expense over a three-year period. During the first quarter of 2002, we discontinued utilizing the EMAX trademarks and, accordingly, determined that the carrying value of the trademarks
had been impaired. As a result, we recognized a charge to income of $7,155,914, the unamortized balance at March 31, 2002, ($1.84 per share) in the first quarter of 2002 (see Note 7 to the Notes to Consolidated Financial Statements for additional
discussion). There were no impairments of other intangible assets during the nine months ended September 30, 2003.



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 capital lease and debt obligations. Net other income (expense) decreased to $0.3 million for the nine months ended September 30, 2003 from $0.8 million for the nine months ended September 30, 2002.
This decrease was primarily from reduced interest income resulting from our use of cash and investments to fund operations during 2002 and the first nine months of 2003 as well as a reduction in interest rates between the comparative periods. We
expect net interest income to continue to be lower in 2003 than in 2002.



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 operations was $201,000
during the nine months ended September 30, 2003 compared to $114,000 during the nine months ended September 30, 2002. Revenues were approximately $244,000 and $576,000 for the nine months ended September 30, 2003 and 2002, respectively. The
reduction in revenue is partially due to operating the business for only five months during 2003 as well as a significant sale during the second quarter of 2002 in the pharmaceutical industry. In addition, we recognized a loss on the sale of the
unit of approximately $247,000 in the second quarter of 2003.



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Cumulative Effect of Accounting Change



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. In accordance with the transitional provisions of
SFAS No. 142, we determined that the carrying value of goodwill and related assets exceeded their fair value. As a result, we recognized a charge to income of $38,257,357 ($9.85 per share), of goodwill impairment as the cumulative effect of a change
in accounting principle during the first quarter of 2002. There was no cumulative effect of accounting change during the nine months ended September 30, 2003.



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 September 30, 2003, we had total cash and investments of $21.4 million, which is comprised of cash and cash equivalents of $14.2 million, short-term investments of $3.3 million and long-term investments of $3.9
million.



Cash used in operating activities was $7.1 million
and $6.2 million during the nine months ended September 30, 2003 and 2002, 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 nine months ended
September 30, 2003 and 2002 was $10.8 million and $(5.8) 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 used by financing activities during the nine months ended September
30, 2003 and 2002, was $0.9 million and $1.4 million, respectively. During the nine months ended September 30, 2003, we repurchased 156,924 shares of our common stock for $0.6 million.



During September 2003, we negotiated a modification and extension of our revolving line of credit with an increased
commitment amount of $3.5 million. The line, which has a balance of $1,562,833 at September 30, 2003, is due on January 3, 2006. Interest is payable monthly at the lenders prime rate (4.0% at September 30, 2003). The loan commitment is
collateralized with restricted investments in the amount of $3,889,000 at September 30, 2003. The funds are available for working capital uses and no other significant conditions are applicable.



During September 2003, we subleased approximately 30% of our Newtown Square,
Pennsylvania office facility. The sublease will reduce our rent costs by approximately $1.5 million over the next 7.5 years.



During the nine months ended September 30, 2003, we incurred an operating loss of $13.3 million. During the two years ended December 31, 2002 we incurred
cumulative operating losses of $119 million and used $25.5 million of cash in operations. We have reduced our quarterly spending to an average of $2.5 million for net cash used in operating activities for the last nine 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 $21.4 million at September 30, 2003 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.



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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.



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.



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 will not renew our guarantee after the maturity of this loan. As this loan approaches the repayment date, it is likely that Mr. Andrews
will sell a portion of his shares of our common stock to repay the guaranteed loan.



New Accounting Pronouncements



In June 2002,
the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS No. 146). SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), (EITF No. 94-3). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This is in contrast to EITF 94-3 which required recognition of a liability upon an entitys commitment to an exit plan. SFAS No. 146
concludes that a commitment, by itself, does not create a present obligation meeting the definition of a liability. This statement establishes fair value as the objective for initial measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have any material impact on our financial statements or results of operations.



In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Series FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersan interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34 (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. The interpretive guidance incorporated without change from Interpretation 34 continues to be required for financial statements for fiscal years ending after June 15, 1981the effective date of
Interpretation 34. The adoption of FIN No. 45 did not have any impact on our financial statements or results of operations. The required disclosures as of September 30, 2003 are presented in Note 8 of the Consolidated Financial Statements.



In December 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement No. 123 (SFAS No. 148) which amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based employee compensation. SFAS No. 148 amends Accounting
Principles Board Opinion No. 28, Interim Financial Reporting, to require prominent disclosure in interim financial information. The provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December
15, 2002 with the interim reporting provisions effective for reporting periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have any material impact on our financial statements or results of operations since we continue to
utilize the provisions of Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, rather than voluntarily change to the fair value based method. The required disclosures as of September 30, 2003 are presented
in Note 2 of the Consolidated Financial Statements.



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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.



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



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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 $13.4 million for the nine months ended September
30, 2003. To date, we have not realized any profits, and as of September 30, 2003, we had an accumulated deficit of $290 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 2003. 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, we have reduced significantly our development expenses, certain sales and marketing expenses and general and administrative expenses since 2001. 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 year, 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. In 2002, we restructured our sales and marketing teams in an effort to increase our revenue generation, and we increased certain sales and marketing expenses in 2003. 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 year, 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.



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. For instance, in 2002, we acquired additional products through our HigherMarkets
acquisition.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 efforts will result in commercially viable products or services. 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.



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 cycle, we may expend substantial funds and management
resources without any corresponding revenue. If approval is



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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 nine
months ended September 30, 2003, two customers accounted for 20% and 10%, respectively, of our total revenues. These 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.



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;
| | - | ------------------------------------------------------------------



| |  | 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 also launched new marketing campaigns in the second half of 2002 and during 2003. We cannot be certain
that our new marketing efforts will be successful in marketing the SciQuest brand. If we are unable to



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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
and Microsoft Solomon Great Plains. 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.



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



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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.



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



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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.



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 acquiring 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;
| | - | ------------------------------------------------------------------------



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| |  | 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.



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.



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|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.



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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.



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|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. SciCentral.com, Inc. and the shareholders of SciCentral.com, Inc. dated February 2, 2000.
|               | 
|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.                                                                                                                     
|               | 
|31.1           |  | Certificate of Chief Executive Officer                                                                                                                                                                                           



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|
|



|Exhibit Number |  | Description                                                                                                            
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------
|               | 
|31.2           |  | Certificate of Chief 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.
|-------- | ----------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K.



A current report on Form 8-K was filed on August 5, 2003, in connection with
the release of SciQuests earnings for the quarter ended June 30, 2003.



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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: November 11, 2003 |  |  |  | By:           
|                        |  |  |  |               
|                        |  |  |  |               



|                        |  |  | 
|----------------------- |  |  | 
|Date: November 11, 2003 |  |  | 
|                        |  |  | 
|                        |  |  | 



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