##### Table of Contents



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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 March 31, 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: 000-27803



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SCIQUEST, INC.

(Exact name of registrant as
specified in its charter)



|Delaware (State or other Jurisdiction of incorporation
or organization) |  | 56-2127592 (I.R.S. Employer Identification
No.)
|----------------------------------------------------------------------- |  | -----------------------------------------------

|                                                                                                      
|------------------------------------------------------------------------------------------------------
|5151 McCrimmon Parkway, Suite 216 Morrisville, North Carolina (Address of principal executive offices)



(919)
659-2100

(Registrants telephone number, including area code)



---



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



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



As of May 2, 2003, 29,041,605 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:                      
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|ITEM 2:                      
|                             
|ITEM 3:                      
|                             
|PART IIOTHER
INFORMATION:   
|                             
|ITEM 1:                      
|                             
|ITEM 2:                      
|                             
|ITEM 3:                      
|                             
|ITEM 4:                      
|                             
|ITEM 5:                      
|                             
|ITEM 6:                      
|                             
|SIGNATURES                   
|                             
|CERTIFICATIONS               



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##### Table of Contents



PART I



Item 1.Financial
Statements



SciQuest, Inc.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                               |  | March 31, 2003 |              |   | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------------ | - | ----------------- | -
|                                                                                                                                                               |  | (unaudited)    |              |   |                   |  
|Assets                                                                                                                                                         |  |                |              |   |                   |  
|Current assets:                                                                                                                                                |  |                |              |   |                   |  
|Cash and cash equivalents                                                                                                                                      |  | $              | 17,778,280   |   |                   | $
|Short-term investments                                                                                                                                         |  |                | 3,539,119    |   |                   |  
|Accounts receivable, net                                                                                                                                       |  |                | 1,460,625    |   |                   |  
|Prepaid expenses and other current assets                                                                                                                      |  |                | 2,067,014    |   |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Total current assets                                                                                                                                           |  |                | 24,845,038   |   |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Long-term investments                                                                                                                                          |  |                | 5,868,028    |   |                   |  
|Property and equipment, net                                                                                                                                    |  |                | 2,102,005    |   |                   |  
|Capitalized software and web site development costs, net                                                                                                       |  |                | 7,661,118    |   |                   |  
|Other intangible assets, net                                                                                                                                   |  |                | 286,281      |   |                   |  
|Other long-term assets                                                                                                                                         |  |                | 394,779      |   |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Total assets                                                                                                                                                   |  | $              | 41,157,249   |   |                   | $
|                                                                                                                                                               |  |                |              |   |                   |  
|Liabilities and Stockholders
Equity                                                                                                                           |  |                |              |   |                   |  
|Current liabilities:                                                                                                                                           |  |                |              |   |                   |  
|Accounts payable                                                                                                                                               |  | $              | 471,489      |   |                   | $
|Accrued liabilities                                                                                                                                            |  |                | 5,291,618    |   |                   |  
|Deferred revenue                                                                                                                                               |  |                | 2,251,173    |   |                   |  
|Current maturities of long-term debt and capital lease obligations                                                                                             |  |                |             |   |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Total current liabilities                                                                                                                                      |  |                | 8,014,280    |   |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Long-term debt and capital lease obligations, less current maturities                                                                                          |  |                | 1,862,833    |   |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Commitments and contingencies                                                                                                                                  |  |                |              |   |                   |  
|Stockholders equity:                                                                                                                                          |  |                |              |   |                   |  
|Common stock, $0.001 par value; 90,000,000 shares authorized; 30,667,939 and 30,874,719
shares issued as of March 31, 2003 and December 31, 2002, respectively |  |                | 30,668       |   |                   |  
|Additional paid-in capital                                                                                                                                     |  |                | 314,450,098  |   |                   |  
|Deferred compensation                                                                                                                                          |  |                | (18,435      | ) |                   |  
|Deferred customer acquisition costs                                                                                                                            |  |                | (4,243       | ) |                   |  
|Accumulated other comprehensive loss                                                                                                                           |  |                | (15,279      | ) |                   |  
|Treasury stock, at cost; 1,626,333 and 727,400 shares as of March 31, 2003 and December
31, 2002, respectively                                                 |  |                | (1,106,287   | ) |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Accumulated deficit                                                                                                                                            |  |                | (282,056,386 | ) |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Total stockholders equity                                                                                                                                     |  |                | 31,280,136   |   |                   |  
|                                                                                                                                                               |  |                |              |   |                   |  
|Total liabilities and stockholders equity                                                                                                                     |  | $              | 41,157,249   |   |                   | $
|                                                                                                                                                               |  |                |              |   |                   |  



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 March 31, |           
|----------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                              |  | 2003                         |           
|Revenues:                                                                     |  |                              |           
|License fees and other professional services                                  |  | $                            | 1,881,029 
|                                                                              |  |                              |           
|Cost of revenues:                                                             |  |                              |           
|Cost of license fees and other professional services                          |  |                              | 723,200   
|Cost of license fees-amortization of acquired and capitalized software
costs  |  |                              | 1,278,628 
|                                                                              |  |                              |           
|Total cost of revenues                                                        |  |                              | 2,001,828 
|                                                                              |  |                              |           
|Gross profit (loss)                                                           |  |                              | (120,799  
|                                                                              |  |                              |           
|Operating expenses:                                                           |  |                              |           
|Development                                                                   |  |                              | 1,281,215 
|Non-cash stock-based compensation                                             |  |                              | 62,377    
|                                                                              |  |                              |           
|Total development expenses                                                    |  |                              | 1,343,592 
|                                                                              |  |                              |           
|Sales and marketing                                                           |  |                              | 1,313,799 
|Non-cash stock-based employee compensation and customer acquisition           |  |                              | 15,797    
|                                                                              |  |                              |           
|Total sales and marketing expenses                                            |  |                              | 1,329,596 
|                                                                              |  |                              |           
|General and administrative                                                    |  |                              | 2,388,311 
|Non-cash stock-based employee compensation and amortization of
intangibles    |  |                              | 30,310    
|                                                                              |  |                              |           
|Total general and administrative expenses                                     |  |                              | 2,418,621 
|                                                                              |  |                              |           
|Restructuring                                                                 |  |                              | 380,000   
|Impairment of intangible assets                                               |  |                              |          
|                                                                              |  |                              |           
|Total operating expenses                                                      |  |                              | 5,471,809 
|                                                                              |  |                              |           
|Operating loss                                                                |  |                              | (5,592,608
|                                                                              |  |                              |           
|Other income (expense):                                                       |  |                              |           
|Interest income                                                               |  |                              | 161,940   
|Interest expense                                                              |  |                              | (20,137   
|Other income, net                                                             |  |                              | 463       
|                                                                              |  |                              |           
|Total other income, net                                                       |  |                              | 142,266   
|                                                                              |  |                              |           
|Loss before cumulative effect of accounting change for impairment of
goodwill |  |                              | (5,450,342
|Cumulative effect of accounting change for impairment of goodwill             |  |                              |          
|                                                                              |  |                              |           
|Net loss                                                                      |  | $                            | (5,450,342
|                                                                              |  |                              |           
|Net loss per common sharebasic and diluted:                                  |  |                              |           
|Before cumulative effect of accounting change                                 |  | $                            | (0.19     
|Cumulative effect of accounting change                                        |  |                              |          
|                                                                              |  |                              |           
|Net loss per share-basic and diluted                                          |  | $                            | (0.19     
|                                                                              |  |                              |           
|Weighted average common shares outstandingbasic and diluted                  |  |                              | 29,417,700
|                                                                              |  |                              |           



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)



|                                                                            |  | Three Months Ended March 31, |           
|--------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                            |  | 2003                         |           
|Cash flows from operating activities                                        |  |                              |           
|Net loss                                                                    |  | $                            | (5,450,342
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                              |           
|Depreciation and amortization                                               |  |                              | 1,996,009 
|Bad debt expense                                                            |  |                              | 50,000    
|Non-cash buyer incentive warrants                                           |  |                              |          
|Accounting change-impairment of goodwill                                    |  |                              |          
|Impairment of intangible assets                                             |  |                              |          
|Amortization of deferred compensation                                       |  |                              | 72,047    
|Amortization of deferred customer acquisition costs                         |  |                              | 4,903     
|Amortization of discount on investments                                     |  |                              | 49,872    
|(Gain) loss from disposal of fixed assets                                   |  |                              | (400      
|Restructuring                                                               |  |                              | 380,000   
|Changes in operating assets and liabilities:                                |  |                              |           
|Accounts receivable                                                         |  |                              | 783,277   
|Prepaid expenses and other current assets                                   |  |                              | 770,117   
|Other assets                                                                |  |                              | (184,818  
|Accounts payable                                                            |  |                              | 64,659    
|Accrued liabilities                                                         |  |                              | (769,317  
|Deferred revenue                                                            |  |                              | (370,271  
|                                                                            |  |                              |           
|Net cash used in operating activities                                       |  |                              | (2,604,264
|                                                                            |  |                              |           
|Cash flows from investing activities                                        |  |                              |           
|Purchase of property and equipment and capitalized software                 |  |                              | (801,149  
|Proceeds from sale of equipment                                             |  |                              | 400       
|Cash paid for acquisitions                                                  |  |                              |          
|Maturity of investments                                                     |  |                              | 14,350,000
|Purchase of investments, including restricted cash                          |  |                              | (4,110,920
|                                                                            |  |                              |           
|Net cash provided by (used in) investing activities                         |  |                              | 9,438,331 
|                                                                            |  |                              |           
|Cash flows from financing activities                                        |  |                              |           
|Repayment of notes payable                                                  |  |                              |          
|Repayment of capital lease obligations                                      |  |                              | (44,721   
|Proceeds from exercise of common stock warrants and options                 |  |                              | 369       
|Purchase of treasury stock                                                  |  |                              | (465,714  
|                                                                            |  |                              |           
|Net cash used in financing activities                                       |  |                              | (510,066  
|                                                                            |  |                              |           
|Effect of exchange rate changes on cash and cash equivalents                |  |                              | (5,874    
|                                                                            |  |                              |           
|Net increase (decrease) in cash and cash equivalents                        |  |                              | 6,318,127 
|Cash and cash equivalents at beginning of period                            |  |                              | 11,460,153
|                                                                            |  |                              |           
|Cash and cash equivalents at end of period                                  |  | $                            | 17,778,280
|                                                                            |  |                              |           



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, higher education and industrial research 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 paper 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.



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 our 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 $282 million at March 31, 2003, incurred a net loss of $5.5 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 March 31, 2003, the Company had total cash
and investments of $27.2 million, which is comprised of cash and cash equivalents of $17.8 million, short-term investments of $3.5 million and long-term investments of $5.9 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, 34% of the Companys revenue for
the three months ended March 31, 2003 was generated by two customers, 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.



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 March 31, 2003



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







will be sufficient to satisfy requirements for more than the next year. However, lower than expected cash flows as a result of lower revenues or increased
expenses could require the Company to raise additional capital in order to maintain its operations.



|2. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------



Unaudited Interim Financial Information



The unaudited interim consolidated financial statements as of and for the three months ended March 31, 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 months ended March 31, 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



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.



Restricted Cash



At March 31, 2003, restricted cash of $680,000, $491,103 and $2,823,578 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, acquisition earn-out commitments, officer and founder loans guaranteed by the Company and other debt.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







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 $288,000
and $332,000 at March 31, 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, Textco, Inc., Groton NeoChem and HigherMarkets, Inc. (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).



Fair Value of Financial Instruments



The carrying values of cash and cash equivalents, accounts
payable and accounts receivable at March 31, 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.



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##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







Impairment of Long-Lived Assets



The Company evaluates the recoverability of its property and equipment and intangible assets in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 requires long-lived assets to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized in the event that the net book value of an asset exceeds the future undiscounted cash flows attributable to such asset or the business to which such
asset relates and the net book value exceeds fair value. The impairment amount is measured as the amount by which the carrying amount of a long-lived asset (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, ($0.25 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 ($1.32 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 paper catalogs into an electronic format, enhancing or enriching the data and distributing the information as directed by the suppliers.



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. In addition, the Company sells subscriptions to
its hosted e-procurement solutions. The implementation services and the total subscription fees are recognized ratably over the term of the agreement.



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



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



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##### Table of Contents

SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







Cost of Revenues



The cost of software licensing, implementation and maintenance revenues consists primarily of personnel costs for employees who work
directly on the development and implementation of customized electronic research solutions and who provide maintenance to customers, and also consists of the amortization of capitalized software development costs. Cost of advertising and
subscription 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.



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.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







Had compensation expense for the plans been determined based on the fair value at the grant dates for awards under the plans consistent
with the methods of SFAS No. 123, the Companys net loss for the three months ended March 31, 2003 and 2002 would have been increased to the pro forma amounts indicated below:



|                                                                                                                                            |  | Three Months Ended March 31, |           
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                                                                                            |  | 2003                         |           
|Net loss available to common stockholders:                                                                                                  |  |                              |           
|As reported                                                                                                                                 |  | $                            | (5,450,342
|Add: Stock-based employee compensation expense included in reported net income, net of
tax related effects                                  |  |                              | 72,047    
|Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects |  |                              | (1,035,025
|                                                                                                                                            |  |                              |           
|SFAS 123 proforma                                                                                                                           |  | $                            | (6,413,320
|                                                                                                                                            |  |                              |           
|Loss per sharebasic and diluted:                                                                                                           |  |                              |           
|As reported                                                                                                                                 |  | $                            | (0.19     
|                                                                                                                                            |  |                              |           
|SFAS 123 proforma                                                                                                                           |  | $                            | (0.22     
|                                                                                                                                            |  |                              |           



The fair
value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the three months ended March 31, 2003 and 2002: risk free interest of
2.9% and 4.5%, respectively; expected lives of five years; dividend yields of 0%; and volatility factors of 125% and 128%, respectively.



Credit Risk, Significant Customers and Concentrations



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



During the three months ended March 31, 2003, two customers
comprised 21% and 13%, respectively, of the Companys revenue. Although substantially all of the Companys revenues are from sales transactions originating in the United States, generating revenue from large sales and installations of
software increases short-term concentrations of credit risk with respect to accounts receivable. This credit risk is typically limited due to the contractual structure and short-term nature of each engagement and because most customers are located
in the United States. At March 31, 2003, two customers comprised 22% and 15%, respectively, of the gross accounts receivable balance.



Prior to June 30, 2002, the Company had a receivable from a customer that was within the final months of a multi-year equipment financing
arrangement that began during 2000. The Company maintained a security interest through UCC filings in the underlying equipment. During the second quarter of 2002, the customer failed to make payments in a timely manner, and accordingly, the Company
initiated legal action. During the third quarter of 2002, a settlement was reached, whereby the Company received cash of $987,500 and the return of substantially all of the underlying collateral. The net value of this receivable was reclassified
from accounts receivable to inventory, and the remaining $95,000 is presented in the prepaid expenses and other current assets classification of the Consolidated Balance Sheet as of March 31, 2003.



Comprehensive Income (Loss)



Effective January 1, 1998, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). 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 months ended March 31, 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 months ended March 31, 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 March 31, 2003, the Company had purchased and placed in treasury 1,626,333 shares of its common stock at a cost of $1,106,287.



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 March 31, 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. The required disclosures as of March 31, 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 is not expected to have any 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 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 in the first year or interim period beginning after June 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 (b) 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 is not expected to have any impact on the Companys financial statements or results of
operations.



Employee Stock Purchase Plan



During 2000, the Board of Directors reserved 1,100,000 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.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







|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 218,737 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 269,215 shares of common stock related to the incentive
payments have been placed in escrow. The cash is included in the Companys restricted cash disclosures. Since the cumulative revenue targets were achieved during 2002, the escrowed incentive payments have been earned, 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 expands SciQuests software product offerings into the early stages of drug
discovery research via biological research software and increases penetration into targeted biotechnology, pharmaceutical and research organizations. Textcos products are used by molecular biologists. Installations include commercial and
academic research organizations and research universities. Textcos two primary products, Gene Construction Kit and Gene Inspector, provide users with an intuitive, graphical technology for gene cloning projects, DNA sequence analyses and
experiment tracking via electronic notebooks.



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.



HigherMarkets, Inc



On June 25, 2002, the Company purchased all of the
outstanding stock of HigherMarkets, Inc. in exchange for the issuance of 652,174 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,



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







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. HigherMarkets products are used by researchers 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 essentially eliminate outsourced procurement services. The
restructuring included the elimination of certain unprofitable business lines and a resultant reduction in workforce of approximately one-half of the employees located in the United States. The restructuring charge included approximately $2.4
million of other costs and lease obligations relating to the unprofitable business lines to be eliminated. This restructuring has been concluded except for the lease obligations.



Due to the additional excess occupancy costs resulting from both an increase in the amount of unutilized
rental space and an increase in the estimated number of months before receiving anticipated sublease proceeds because of the depressed local commercial real estate markets, 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, 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.



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



|                                         |  | Restructuring Plans |           | Additional Restructuring Expenses |   | Impairment Expenses and Charges to Liability |  | Remaining Liability at March 31, 2003
|---------------------------------------- |  | ------------------- | --------- | --------------------------------- | - | -------------------------------------------- |  | -------------------------------------
|Number of employees                      |  |                     |          |                                   |   | 36                                           |  |                                      
|                                         |  |                     |           |                                   |   |                                              |  |                                      
|Involuntary termination benefits         |  | $                   |          |                                   | $ | 380,000                                      |  | $                                    
|Other costs, primarily lease obligations |  |                     | 5,246,239 |                                   |   |                                             |  |                                      
|                                         |  |                     |           |                                   |   |                                              |  |                                      
|Total                                    |  | $                   | 5,246,239 |                                   | $ | 380,000                                      |  | $                                    
|                                         |  |                     |           |                                   |   |                                              |  |                                      



|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 4,101,680 warrants to purchase the Companys common stock at an exercise price of $0.01 per share of which 56,250 warrants were issued and outstanding
at March 31, 2003. During 2001 and 2002, warrants representing 3,694,386 shares of common stock were cancelled. These cancellations will not have any effect on net stockholders equity. Future amortization costs will be reduced by an
undetermined amount. At March 31, 2003 and December 31, 2002, the Company had deferred customer acquisition costs of $3,259,332 and $3,255,394, respectively, with accumulated amortization of $3,255,089 and $3,250,186, respectively, resulting in net
costs of $4,243 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.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







The Company recognized $4,903 and $668,616 in stock-based non-cash customer acquisition expense during the three months ended March 31, 2003 and 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. Damages in an unspecified amount are sought, together with interest, costs and attorneys fees. The Company intends to continue its vigorous defense against the
action.



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.



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 ($1.32 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, ($0.25 per
share) in the first quarter of 2002.



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SciQuest, Inc.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)







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, and
secured the loan with a certificate of deposit in a like amount. 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 January 2002, the Company renewed its guarantee of a
$380,000 real estate loan to a co-founders family partnership and secured the loan with a certificate of deposit in a like amount. The loan bears interest at prime rate and becomes payable in full in January 2004. The transaction was approved
by a majority of the Companys disinterested directors.





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##### Table of Contents



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



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



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



| |  |  | 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 expansion;
| | - |  | ----------------------------



| |  |  | 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



SciQuest provides technology, services and domain expertise
to optimize procurement and materials management for the life sciences, higher education and industrial research 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 platform. As a result, we are reducing costs in other areas. These cost
reductions will result in the elimination of approximately 50 full-time positions. We expect to complete these reductions during the second quarter of 2003.



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 paper catalogs into an electronic format, enhancing or
enriching the data and distributing the information as directed by the suppliers.



Revenues consist of (1) sales of software licenses and fees for implementation, customization and maintenance services related to these software licenses, (2) advertising revenues from our web sites,
(3) managing suppliers product catalog content, and (4) advertising revenues from the Source Book. We expect that sales of software licenses and fees for implementation, customization and maintenance services related to these software licenses
will continue to be the primary source of revenues in future periods.



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.



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. 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.



Recent Acquisitions



Textco, Inc.



On February 19, 2002, we purchased all of the outstanding
stock of Textco, Inc. in exchange for the issuance of 218,737 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 merger agreement includes incentive payments upon achievement of cumulative revenue targets during the
first year. Cash of $180,000 and 269,215 shares of common stock related to the incentive payments have been placed in escrow. The cash is included in our restricted cash disclosures. Since the cumulative revenue targets were achieved during 2002,
the escrowed incentive payments have been earned, 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 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 our software product offerings
into the early stages of drug discovery research via biological research software and increased penetration into targeted biotechnology, pharmaceutical and research organizations. Textcos products are used by molecular biologists.
Installations include commercial and academic research organizations and research universities. Textcos two primary products, Gene Construction Kit and Gene Inspector, provide users with an intuitive, graphical technology for gene cloning
projects, DNA sequence analyses and experiment tracking via electronic notebooks.



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.



HigherMarkets,
Inc.



On June 25, 2002, we purchased
all of the outstanding stock of HigherMarkets, Inc. in exchange for the issuance of 652,174 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 designed to meet the unique needs of this industry. HigherMarkets products are used by researchers and procurement departments of universities,
colleges, research institutions and other post-secondary education 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.



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.



Allowance for doubtful accounts.We bear all risk of loss on credit sales of products, licenses and professional services. The allowance for doubtful accounts at March 31, 2003 represents
approximately 17% of total gross accounts receivable.



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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.



Prior to June 30, 2002, we had a receivable from a customer that was within the final months of a multi-year equipment financing arrangement that began during 2000. We maintained a security interest through UCC filings in the
underlying equipment. During the second quarter of 2002, the customer failed to make payments in a timely manner, and accordingly, we initiated legal action. During the third quarter of 2002, a settlement was reached, whereby we received cash of
$987,500 and the return of substantially all of the underlying collateral. The net value of this receivable was reclassified from accounts receivable to inventory, and the remaining $95,000 is presented in the prepaid expenses and other
current assets classification of the Consolidated Balance Sheet as of March 31, 2003.



Deferred customer acquisition costs.Deferred customer acquisition costs relate to common stock warrants given 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 the warrants are fully vested and non-forfeitable. 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. 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. As discussed above, changes in our closing trading price from one reporting period to the next will affect our
amortization of these costs, and consequently, our results of operations. Because the amortization of these costs is dependent upon the trading price of our common stock, we cannot predict the future impact of this amortization on our results from
operations. However, due to the reduced number of warrants outstanding as of March 31, 2003, we do not anticipate the amortization in future periods to be material.



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. Any resulting writedown may be material to our financial position and
results of operations.



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 ($1.32 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.



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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, ($0.25 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.



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.



Internal Controls



Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
our Chief Executive Officer and Chief Financial Officer have reviewed our companys disclosure controls and procedures as of a date within 90 days prior to this quarterly report (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 March 31, 2003 and 2002



Revenues



Revenues for the three months ended March 31, 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 solutions.



During the three months ended March 31, 2003 and 2002, we recognized $1.9 million and $1.7 million,
respectively, of revenue from fees from licenses and other professional services.



During the three months ended March 31, 2003, two customers accounted for 21% and 13%, 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.





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Cost of
revenues for license fees and other professional services for the three months ended March 31, 2003 and 2002 was $2.0 million and $1.5 million, respectively, of which $1.3 million and $0.9 million, respectively, related to the amortization of
acquired and capitalized software development costs.



Gross
Profit



Gross profit decreased to $(0.1)
million for the three months ended March 31, 2003 from $0.1 million for the three months ended March 31, 2002. The reduction in gross profit is primarily attributable to an increase in amortization of acquired and capitalized software development
costs relating to technology added from recent acquisitions and our Enterprise Substance Manager software to $1.3 million from $0.9 million. This increase in amortization cost of $0.4 million is somewhat offset by the increase in revenue of
approximately $0.2 million. This increase in revenue contributed gross profit of approximately $0.1 million.



Operating Expenses



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



Development costs decreased to $1.3 million for
the three months ended March 31, 2003 from $1.9 million for the three months ended March 31, 2002. In 2002 and 2003, we began refocusing our development expenditures to our procurement product platform. As a result, this decrease is attributable to
the reduction in development expenses in areas other than our procurement product platform. During the three months ended March 31, 2003 and 2002, we capitalized approximately $0.7 million and $0.7 million, respectively, of certain costs related to
software and web site development projects.



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



Included in development cost is the amortization of non-cash
stock-based employee compensation expense, which totaled $0.1 million and $0.1 million for the three months ended March 31, 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.



Sales and Marketing Expenses. Sales and marketing
expenses consist primarily of ongoing 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 $1.3 million for the three months ended March 31, 2003 from $1.9 million for the three months ended March 31, 2002. This net decrease resulted primarily from increased ongoing expenses from $1.2 million to $1.3
million offset by the decrease in amortization of non-cash stock-based employee compensation and customer acquisition costs.



Ongoing operating expenses increased because of additional personnel and related expenses to expand efforts to introduce, market and sell
the products that we have acquired via acquisitions and developed internally.



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, we cannot predict the future
impact of this amortization on our results from operations. During 2001 and the second half of 2002, the majority of these warrants were cancelled. Accordingly, non-cash stock-based customer acquisition costs for the three months ended March 31,
2003 decreased to



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approximately $5,000 from $0.7
million for the three months ended March 31, 2002 and are expected to be minimal in the future.



We expect our sales and marketing expenses, apart from the amortization of stock-based customer acquisition costs, to continue to be somewhat higher in 2003 than in 2002, as we continue the expansion
of our sales and marketing efforts to introduce and sell the new products that we have acquired and developed.



General and Administrative Expenses. General and administrative expenses consist primarily of ongoing 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 $2.4
million for the three months ended March 31, 2003 from $3.8 million for the three months ended March 31, 2002. The decrease in total general and administrative expenses of $1.4 million is comprised of an increase in ongoing operating expenses of
$0.4 million offset by a decrease in the amortization of intangibles of $1.8 million.



This increase in ongoing operating expenses is the result of increased operating and lease costs related to the recent acquisitions and increases in other recurring costs such as directors and officers
insurance.



Non-cash stock-based employee
compensation and amortization of intangible assets decreased to approximately $30,000 from $1.8 million during the three months ended March 31, 2002. The amortization related primarily to our March 2000 acquisition of EMAX Solutions. There was no
amortization of goodwill or intangible trademark assets during the three months ended March 31, 2003 as a result of the change in accounting for goodwill and the discontinuance of the EMAX trademarks as discussed in Note 7 of the Consolidated
Financial Statements.



We expect general and
administrative expenses for the remainder of 2003 to be comparable to the 2002 level.



Restructuring. During the first quarter of 2003, the Company began refocusing resources to support its procurement product platform and reducing costs in other areas, which resulted in an
elimination of approximately 50 full-time positions by the end of the second quarter of 2003. 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 expect to be completed with this restructuring by the end of the second quarter.



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, ($0.25 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 three months ended March 31, 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 $0.1 million for the three months ended March 31, 2003 from $0.3 million for the three months ended
March 31, 2002. This decrease was primarily from reduced interest income resulting from our use of



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cash and investments to fund
operations during 2002 and the first three 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.



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 ($1.32 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 three months ended March 31, 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 March 31, 2003, we had total cash and investments of $27.2 million, which is comprised of cash and cash equivalents of $17.8 million, short-term investments of $3.5 million
and long-term investments of $5.9 million.



Cash
used in operating activities was $2.6 million and $1.6 million during the three months ended March 31, 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 three months ended March 31, 2003 and 2002 was $9.4 million and ($1.4) million, respectively. Cash used in investing activities has primarily been comprised of purchases of investments in US
government obligations, commercial paper and corporate bonds, purchases of computer equipment and the capitalization of certain costs associated with the development of our web sites and with the development of research software systems. During the
three months ended March 31, 2002, we paid approximately $0.8 million related to acquisitions. Cash was primarily provided from the maturity of investments.



Cash used by financing activities during the three months ended March 31, 2003 and 2002, was $0.5 million and $0.2 million, respectively.
During the three months ended March 31, 2003, we repurchased 898,933 shares of our common stock for $0.5 million.



During the three months ended March 31, 2003, we incurred an operating loss of $5.6 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 spending to an average of $2.5 million for net cash used in operating activities for the last seven 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 $27.2 million at March 31, 2003 will be sufficient to satisfy our cash requirements for more
than the next year. However, lower than expected cash flows as a result of lower revenues or increased expenses could require us to raise additional capital in order to maintain our operations. There are significant uncertainties, based on recent
economic conditions and our limited operating experience as a software and related services provider, as to whether debt or equity financing will be available if we are required to seek additional funds. Even if we are able to secure funds in the
debt or equity markets, we may not be able to do so on terms that are favorable or acceptable to us. Any additional equity financing, if available, could result in substantial dilution to our existing stockholders.



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



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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. We secured the loan with a certificate of deposit in a like amount. 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 for the three months ended March 31, 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. The required
disclosures as of March 31, 2003 are presented in Note 2 of the Consolidated Financial Statements.



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.



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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 is not expected to have any 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 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 in the first year or interim period beginning after June 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 (b) 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 is not expected to have any 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 platform. Accordingly, we have only a limited operating history on which to evaluate our
evolving business model. As a result of our limited operating history and the evolving nature of our business model, we may be unable to accurately forecast our revenues. We incur expenses based predominantly on operating plans and estimates of
future revenues. Revenues to be generated from newly developed and evolving activities will be particularly difficult to forecast accurately. Our expenses are to a large extent fixed. We may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfalls. Accordingly, a failure to meet our revenue projections will have an immediate and negative impact on profitability. Finally, we cannot be certain that our evolving business model will be successful,
particularly in light of our limited operating history.



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



We incurred a net loss of $5.5 million for the three months ended March 31, 2003. To date, we have not realized any profits, and as of
March 31, 2003, we had an accumulated deficit of $282 million. We expect to incur substantial operating



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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 significantly reduced 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 intend to increase 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 Textco, Groton NeoChem and HigherMarkets acquisitions.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 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
| | - |  | ---------------------------------------------------------------------------------------





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| |  |  | 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 typically incur costs associated with customization of our products and services with a sale to a large account. If we do not generate sufficient revenues to offset any lower
margins or these increased costs, our operating results may be materially and adversely affected. Also, the time between billing and receipt of revenues is often longer when dealing with larger accounts due to increased administrative overhead.



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



We expect that for the foreseeable future we will generate a significant portion of our revenues from a limited number of large customers.
During the three months ended March 31, 2003, two customers accounted for 21% and 13%, respectively, of our total revenues. In addition, large individual transactions with these customers may represent an increasing percentage of our 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. For instance, we had a receivable from a customer that was within the final months of a multi-year equipment financing arrangement that began during
2000. We maintained a security interest through UCC filings in the underlying equipment. During the second quarter of 2002, the customer failed to make payments in a timely manner, and accordingly, we initiated legal action. During the third quarter
of 2002, a settlement was reached, whereby we received cash of $987,500 and the return of substantially all of the underlying collateral. The net value of this receivable (valued at approximately $95,000 at March 31, 2003) has been reclassified from
accounts receivable to inventory and is presented in the prepaid expenses and other current assets classification of the Consolidated Balance Sheet as of March 31, 2003. If it is subsequently determined that the returned equipment has a lower resale
value than currently estimated, additional charges against operating results may be required.



Unless a broad range of purchasers and suppliers of scientific 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 scientific 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
reduced our spending on sales and marketing significantly beginning in the fourth quarter of 2000 and through 2002. This reduction in spending could materially and adversely affect our sales and marketing efforts. While we increased certain sales
and



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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 the first quarter of 2003. We cannot be certain that our new marketing
efforts will be successful in marketing the SciQuest brand. If we are unable to successfully promote our brand, or if we incur substantial expenses in attempting to do so, our revenues and earnings could be materially and adversely affected.



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



We have invested significant time and other 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 all services is the efficiencies created for suppliers and buyers through our products and
services. In order to create these efficiencies, it will often be necessary that our systems integrate with customers internal systems, such as inventory, customer service, technical service, high throughput screening and robotic 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 technology 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.



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



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



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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, industrial research and higher
education markets.



We derive a significant
portion of our revenue from the life sciences, industrial research 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, industrial research 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 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.



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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 buyer 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. In particular, we acquired EMAX in 2000, and Textco, HigherMarkets and the assets of Groton NeoChem in 2002. An element of our strategy is to broaden the scope and content of our products and services through the
acquisition of existing products, technologies, services and businesses. Acquisitions entail numerous risks, including:



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



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



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



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



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

|
|





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| |  |  | 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
activities internationally, particularly in Europe. The expansion 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, the business customs and regulations in foreign countries may require changes in our business model. 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.



The price of our common stock could result in the delisting of our stock from the Nasdaq SmallCap Market, which could adversely affect the trading of
our common stock.



On October 11, 2002, we
transferred the listing of our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market. In order to satisfy Nasdaqs minimum listing maintenance requirements for both the Nasdaq National Market and the Nasdaq SmallCap Market,
we must satisfy various financial tests, including maintaining a minimum closing bid price of at least $1.00. Transferring to the Nasdaq SmallCap Market enables us to take advantage of the extended grace period provided by the Nasdaq SmallCap Market
to meet the minimum $1.00 per share closing bid price requirement for continued listing. As a result of this transfer, the closing bid price of our common stock must be above $1.00 for a minimum of 10 consecutive trading days by July 14, 2003 in
order to avoid initiation of procedures to delist our common stock from the Nasdaq SmallCap Market. If the closing bid price of our common stock is above $1.00 for a minimum of 30 consecutive trading days by July 14, 2003, we will be eligible for
transfer to the Nasdaq National Market under its continued listing requirements. We cannot be assured that the closing bid price of our common stock will rise and remain above $1.00 in the future to permit us to maintain our Nasdaq SmallCap Market
listing or to regain our listing on the Nasdaq National Market. If our common stock is delisted from the Nasdaq SmallCap Market, it would be listed on the OTC Bulletin Board, which is viewed by most investors as a less desirable and less liquid
marketplace. Thus, delisting from the Nasdaq SmallCap Market could make trading our common stock more difficult for investors, potentially leading to further declines in share prices.



We obtained stockholder approval at our 2003 annual meeting of stockholders for our board of directors to
have the authority to implement a reverse stock split in an effort to increase our common stock price by reducing the number of shares outstanding. We plan to implement the reverse stock split during the second quarter of 2003. However, we cannot
assure you that the reverse stock split will result in a higher common stock price over an extended period of time. In addition, the



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reduced number of shares of
common stock resulting from the reverse stock split could adversely affect the liquidity of our common stock.



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.



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. Damages in an unspecified amount are sought, together with interest, costs and attorneys fees.



It is too early in this matter to reasonably predict the probability of the outcome or to estimate a range of possible losses. 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



(a) Our Annual Meeting of Stockholders was held on April 30, 2003. There were present at the annual meeting, in person or by proxy,
holders of 26,199,904 shares of the Common Stock entitled to vote.



(b) The following directors were elected to hold office until the indicated annual meeting of stockholders, or until their successors are elected and qualified, with the vote for each director being reflected below:



|Name                    |  | Term Expiration |  | Votes For  |  | Votes Withheld
|----------------------- |  | --------------- |  | ---------- |  | --------------
|Bruce J. Boehm          |  | 2006            |  | 26,028,868 |  | 171,036       
|Louis M. Sherwood, M.D. |  | 2006            |  | 25,930,466 |  | 269,438       
|Lloyd M. Segal.         |  | 2006            |  | 25,929,928 |  | 269,976       



The
affirmative vote of a plurality of the shares of Common Stock cast, in person or by proxy, at the Annual Meeting was required to elect each director. Noel J. Fenton and Stephen J. Wiehe will continue as directors until the election and



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qualification of successor
directors at the 2004 annual meeting of stockholders. M. Scott Andrews and H. Alexander Holmes will continue as directors until the election and qualification of successor directors at the 2005 annual meeting of stockholders.



(c) The approval for the authorization for the Board of
Directors to amend the certificate of incorporation to effect a reverse stock split at one of three ratios was ratified with 25,486,398 affirmative votes cast, 561,326 negative votes cast and 152,179 abstentions. The approval of the authorization to
amend the certificate of incorporation to effect a reverse stock split at one of three ratios required the affirmative vote of a majority of the issued and outstanding shares of common stock as of March 14, 2003.



(d) The appointment of PricewaterhouseCoopers LLP as
independent auditor for the year ending December 31, 2003, was ratified with 26,013,234 affirmative votes cast, 67,417 negative votes cast and 119,253 abstentions. The appointment of PricewaterhouseCoopers LLP required the affirmative vote of a
majority of the shares represented at the Annual Meeting for purposes of such proposal.



Item 5.Other Information.



None.



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*           |  | 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 SciQuestStock Option Plan dated as of February 26,
1999.                                                                                                                             
|              
|10.4*          |  | Amendment No. 3 to SciQuestStock Option Plan dated as of March 1,
1999.                                                                                                                                 
|              
|10.5*          |  | Amendment No. 4 to SciQuestStock 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**         |  | Merger Agreement by and among SciQuest, Lujack Subsidiary, Inc., Intralogix, Inc.,
Mary T. Romac, Timothy M. Brady and Dale L. Young dated January 14, 2000.                                            





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|Exhibit Number |  | Description                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|10.10**        |  | Merger Agreement by and among SciQuest, SciCentral Acquisition Subsidiary, Inc.,
SciCentral.com, Inc. and the shareholders of SciCentral.com, Inc. dated February 2, 2000.
|              
|10.11**        |  | Agreement and Plan of Merger and Reorganization between SciQuest, ESP Acquisition,
Inc. and EMAX Solution Partners, Inc. dated March 13, 2000.                            
|              
|10.12**        |  | SciQuest 2000 Employee Stock Purchase Plan.                                                                                                                               
|              
|10.13***       |  | Second Amendment to 1999 Stock Incentive Plan.                                                                                                                            
|              
|10.14****      |  | Form of Services Agreement.                                                                                                                                               
|              
|10.15*****     |  | Form of Master License and Services Agreement.                                                                                                                            
|              
|10.16*****     |  | Executive Employment Agreement by and between SciQuest and Stephen J. Wiehe, dated
February 5, 2002.                                                                      
|              
|10.17******    |  | Agreement and Plan of Merger, dated as of June 25, 2002, by and among SciQuest,
HigherMarkets Acquisition, Inc. and HigherMarkets, Inc.                                   
|              
|10.18*         |  | Lease Agreement by and between Duke-Weeks Realty Limited Partnership and SciQuest
dated as of October 19, 1999.                                                           
|              
|10.19*******   |  | Lease Agreement by and between Brandywine Operating Partnership, L.P. and SciQuest
dated as of October 2000.                                                              
|              
|99.1           |  | 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.
|------- |  | --------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K.



A current report on Form 8-K was filed on April 30, 2003, in
connection with the release of SciQuests earnings for the quarter ended March 31, 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: |  | May 9, 2003 |  |               
|      |  |             |  |               
|      |  |             |  |               
|      |  |             |  |               
|      |  |             |  |               
|     
|Date: |  | May 9, 2003 |  |               
|      |  |             |  |               
|      |  |             |  |               
|      |  |             |  |               
|      |  |             |  |               











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CERTIFICATE OF CHIEF EXECUTIVE OFFICER



I, Stephen J. Wiehe, the Chief Executive Officer, of SciQuest, Inc. (the registrant), certify that:



1. I have reviewed this quarterly report on Form 10-Q of the registrant;



2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



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



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which the periodic reports are being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants internal disclosures controls and procedures as of a date within 90 days prior to this quarterly report (the
Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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



Dated this 9th day of May, 2003



/s/    STEPHEN J.
WIEHEStephen J. WieheChief Executive Officer






40



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##### Table of Contents



CERTIFICATE
OF CHIEF FINANCIAL OFFICER



I, James J.
Scheuer, the Chief Financial Officer, of SciQuest, Inc. (the registrant), certify that:



1. I have reviewed this quarterly report on Form 10-Q of the registrant;



2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



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



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which the periodic reports are being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants internal disclosures controls and procedures as of a date within 90 days prior to this quarterly report (the
Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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



Dated this 9th day of May, 2003



/s/    JAMES J.
SCHEUERJames J. ScheuerChief Financial Officer






41