<PAGE>   1

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

                                       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 000-27913

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

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

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

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

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X]  NO [ ]

     The number of shares of the registrant's common stock outstanding as of the
close of business on September 30, 2000 was 38,007,314.

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<PAGE>   2

                               FREEMARKETS, INC.

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

                                     INDEX

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
            Condensed Consolidated Balance Sheets as of
            September 30, 2000 (unaudited) and December 31,
            1999............................................    3
            Condensed Consolidated Statements of Operations
            for the three and nine months ended September
            30, 2000 and 1999 (unaudited)...................    4
            Condensed Consolidated Statements of Cash Flows
            for the nine months ended September 30, 2000 and
            1999 (unaudited)................................    5
            Notes to Condensed Consolidated Financial
            Statements......................................    6

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

Item 3.  Quantitative and Qualitative Disclosures About
         Market Risk........................................   22

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings..................................   23

Item 6.  Exhibits and Reports on Form 8-K...................   23

Signature...................................................   24
</TABLE>
<PAGE>   3

                        PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                       FREEMARKETS, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,    DECEMBER 31,
                                                                  2000             1999
                                                              -------------    ------------
                                                               (UNAUDITED)
<S>                                                           <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 52,467,719     $177,204,143
  Short-term investments....................................    81,141,118       33,040,205
  Accounts receivable, net..................................    24,358,845        6,887,270
  Other current assets......................................     6,074,064        1,441,111
                                                              ------------     ------------

     Total current assets...................................   164,041,746      218,572,729
Property and equipment, net.................................    33,084,494       12,114,672
Other assets, net...........................................     1,082,769          966,680
Goodwill, net...............................................   293,050,031               --
                                                              ------------     ------------

     Total assets...........................................  $491,259,040     $231,654,081
                                                              ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  5,248,113     $  4,763,795
  Accrued incentive compensation............................     7,858,208          899,410
  Accrued acquisition costs.................................     4,684,319               --
  Other current liabilities.................................    15,300,882        2,559,462
  Current portion of long-term debt.........................     1,848,012        1,499,962
                                                              ------------     ------------

     Total current liabilities..............................    34,939,534        9,722,629

Long-term debt..............................................     2,686,672        3,277,716
                                                              ------------     ------------

     Total liabilities......................................    37,626,206       13,000,345
                                                              ------------     ------------

Commitments and contingencies
Stockholders' equity:
  Common stock..............................................       380,060          351,391
  Additional capital........................................   582,576,692      244,909,299
  Unamortized stock-based expense...........................   (87,829,818)      (1,525,194)
  Stock purchase warrants...................................    95,484,375           30,000
  Accumulated other comprehensive loss......................      (185,594)        (110,409)
  Accumulated deficit.......................................  (136,792,881)     (25,001,351)
                                                              ------------     ------------

     Total stockholders' equity.............................   453,632,834      218,653,736
                                                              ------------     ------------

     Total liabilities and stockholders' equity.............  $491,259,040     $231,654,081
                                                              ============     ============
</TABLE>

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

                       FREEMARKETS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED               NINE MONTHS ENDED
                                            SEPTEMBER 30,                   SEPTEMBER 30,
                                     ---------------------------    -----------------------------
                                         2000           1999            2000             1999
                                     ------------    -----------    -------------    ------------
<S>                                  <C>             <C>            <C>              <C>
Revenues...........................  $ 26,584,298    $ 5,355,298    $  56,766,601    $ 13,037,297
Cost of revenues...................    14,280,046      3,218,219       31,579,640       7,367,079
                                     ------------    -----------    -------------    ------------
     Gross profit..................    12,304,252      2,137,079       25,186,961       5,670,218
                                     ------------    -----------    -------------    ------------
Operating costs:
  Research and development.........     5,320,769      1,598,938       12,999,509       2,959,635
  Sales and marketing..............    11,711,473      3,162,826       29,253,563       5,625,287
  General and administrative.......     9,922,291      2,489,726       22,968,794       5,890,462
  Stock-based expense..............     5,264,495      4,728,184        9,690,296       4,728,184
  Goodwill amortization............    29,522,998             --       61,225,941              --
  Write-off of in-process research
     and development...............            --             --        7,396,853              --
                                     ------------    -----------    -------------    ------------
Total operating costs..............    61,742,026     11,979,674      143,534,956      19,203,568
                                     ------------    -----------    -------------    ------------
     Operating loss................   (49,437,774)    (9,842,595)    (118,347,995)    (13,533,350)
Other income, net..................     2,305,624        120,213        6,556,465          53,874
                                     ------------    -----------    -------------    ------------
     Net loss......................  $(47,132,150)   $(9,722,382)   $(111,791,530)   $(13,479,476)
                                     ============    ===========    =============    ============

Basic and diluted earnings per
  share............................  $      (1.25)   $      (.68)   $       (3.03)   $      (1.00)
                                     ============    ===========    =============    ============
Shares used in computing basic and
  diluted earnings per share.......    37,752,565     14,288,621       36,860,650      13,451,407
                                     ============    ===========    =============    ============
</TABLE>

   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
                                        4
<PAGE>   5

                       FREEMARKETS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                              -----------------------------
                                                                  2000             1999
                                                              -------------    ------------
<S>                                                           <C>              <C>
Cash flows from operating activities:
  Net loss..................................................  $(111,791,530)   $(13,479,476)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization..........................      6,486,090         620,368
     Provision for bad debts................................        646,665          89,316
     Loss on disposal of property and equipment.............      2,502,496         118,797
     Stock-based expense....................................      9,690,296       4,728,184
     Goodwill amortization..................................     61,225,941              --
     Write-off of in-process research and development.......      7,396,853              --
  Cash (used in) provided by changes in:
     Accounts receivable....................................    (17,610,760)     (2,105,812)
     Other assets...........................................     (4,744,158)     (1,168,972)
     Accounts payable.......................................     (2,083,901)      1,496,291
     Other liabilities......................................     18,564,290       1,100,844
                                                              -------------    ------------
          Net cash used in operating activities.............    (29,717,718)     (8,600,460)
                                                              -------------    ------------
Cash flows from investing activities:
  Acquisitions, net of cash acquired........................    (16,660,333)             --
  Purchases of short-term investments, net..................    (48,128,474)    (10,289,831)
  Capital expenditures, net.................................    (25,564,496)     (4,431,366)
  Software development costs................................     (2,217,285)             --
  Patent and trademark costs................................       (129,765)       (213,595)
                                                              -------------    ------------
          Net cash used in investing activities.............    (92,700,353)    (14,934,792)
                                                              -------------    ------------
Cash flows from financing activities:
  Proceeds from debt........................................             --       4,226,630
  Repayment of debt.........................................     (4,112,897)     (2,008,960)
  Proceeds from the issuance of preferred stock and exercise
     of stock options and warrants..........................      1,794,544      41,920,378
                                                              -------------    ------------
          Net cash (used in) provided by financing
            activities......................................     (2,318,353)     44,138,048
                                                              -------------    ------------
Net change in cash and cash equivalents.....................   (124,736,424)     20,602,796
Cash and cash equivalents at beginning of period............    177,204,143       1,655,932
                                                              -------------    ------------
Cash and cash equivalents at end of period..................  $  52,467,719    $ 22,258,728
                                                              =============    ============

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

   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
                                        5
<PAGE>   6

                       FREEMARKETS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION

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

NOTE 2.  EARNINGS PER SHARE

     The computation of earnings per share is as follows:

<TABLE>
<CAPTION>
                           THREE MONTHS ENDED             NINE MONTHS ENDED
                             SEPTEMBER 30,                  SEPTEMBER 30,
                       --------------------------    ----------------------------
                           2000          1999            2000            1999
                       ------------   -----------    -------------   ------------
<S>                    <C>            <C>            <C>             <C>
Net loss.............  $(47,132,150)  $(9,722,382)   $(111,791,530)  $(13,479,476)
Weighted average
  common shares used
  in computing basic
  and diluted
  earnings per
  share..............    37,752,565    14,288,621       36,860,650     13,451,407
Basic and diluted
  earnings per
  share..............  $      (1.25)  $      (.68)   $       (3.03)  $      (1.00)
</TABLE>

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

<TABLE>
<CAPTION>
                              THREE MONTHS ENDED          NINE MONTHS ENDED
                                 SEPTEMBER 30,              SEPTEMBER 30,
                            -----------------------    ------------------------
                              2000          1999          2000          1999
                            ---------    ----------    ----------    ----------
<S>                         <C>          <C>           <C>           <C>
Stock options and
  warrants................  9,590,648     8,148,678    11,437,153     7,912,973
Convertible preferred
  stock...................         --    14,230,946            --    12,943,105
</TABLE>

NOTE 3.  ACQUISITIONS

     In March 2000, the Company acquired iMark.com, Inc. ("iMark"), a
business-to-business online marketplace for surplus equipment and inventory. The
Company issued 1,573,725 shares of its common stock and assumed 176,275 options
with an aggregate total value of $333.6 million, in exchange for all of the
outstanding shares and options of iMark. The acquisition was accounted for as a
purchase business combination, and the purchase price of $339.7 million,
including estimated transaction costs of $6.0 million, was allocated as follows:

<TABLE>
<S>                                                           <C>
Goodwill and other intangible assets........................  $336,334,000
In-process research and development.........................     7,397,000
Liabilities assumed in excess of the fair value of assets
  acquired..................................................    (4,047,000)
                                                              ------------
Total purchase price........................................  $339,684,000
                                                              ============
</TABLE>

                                        6
<PAGE>   7
                       FREEMARKETS, INC. AND SUBSIDIARIES

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

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

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

     Final allocation of the purchase price for iMark and Surplus Record is not
expected to differ significantly from the preliminary allocations and is
expected to be completed in 2001.

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

<TABLE>
<CAPTION>
                                              NINE MONTHS ENDED SEPTEMBER 30,
                                              --------------------------------
                                                  2000                1999
                                              ------------        ------------
                                                        (UNAUDITED)
<S>                                           <C>                 <C>
Revenues....................................    57,588,214          15,303,389
Goodwill amortization.......................   (88,568,881)        (88,568,881)
Net loss....................................  (138,377,877)       (104,140,974)
Basic and diluted earnings per share........         (3.60)              (6.93)
</TABLE>

NOTE 4.  COMPREHENSIVE INCOME OR LOSS

     Other comprehensive loss includes the net effect of foreign currency
translation adjustments and unrealized gains or losses on short-term
investments. Including the net loss from the condensed consolidated statements
of operations, comprehensive loss was $47.0 million, $9.7 million, $111.9
million and $13.5 million for the three and nine months ended September 30, 2000
and 1999, respectively.

NOTE 5.  SEGMENT REPORTING

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

     Revenues are attributed to countries based on the location of the Company's
customers. For the three and nine months ended September 30, 2000 and 1999, over
90% of the Company's revenues and assets were derived from its operations within
the United States.

NOTE 6.  SECURITIES CLASS ACTION COMPLAINT

     Ten securities fraud class action complaints have been filed against the
Company and three executive officers in federal court in Pittsburgh,
Pennsylvania. The complaints allege that the Company and the other defendants

                                        7
<PAGE>   8
                       FREEMARKETS, INC. AND SUBSIDIARIES

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

violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 because
they allegedly knew that General Motors Corporation would terminate its contract
with the Company by the first quarter of 2000 and allegedly concealed this
information.

     By order dated February 29, 2000, the court consolidated all of the cases
into a single proceeding. On April 29, 2000, the lead plaintiffs filed a
consolidated amended complaint which supersedes all of the earlier-filed
complaints. The consolidated amended complaint contains the same allegations as
those asserted in the earlier complaints. The Company and the individual
defendants have filed a motion seeking dismissal of the case on the ground that
the allegations of the consolidated amended complaint are, as a matter of law,
insufficient to warrant discovery and trial of the plaintiffs' claim. The motion
has been fully briefed by the parties and awaits a decision by the court. The
Company and the individual defendants believe that the plaintiffs' allegations
are completely without merit and they intend to vigorously defend the
litigation.

NOTE 7.  WARRANTS

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

NOTE 8.  SUBSEQUENT EVENT

     In November 2000, the Company entered into a one-year bank credit facility
that provides for a $20.0 million line of credit. Funds borrowed under the line
of credit may be used for working capital requirements and general corporate
purposes. To date, the Company has borrowed $3.8 million under this facility to
retire the bank credit facility that was in place as of September 30, 2000. As
with the previous facility, the new credit facility contains restrictive
covenants and other financial reporting requirements.

                                        8
<PAGE>   9

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

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

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

OVERVIEW

     FreeMarkets creates business-to-business online auctions for buyers of
industrial parts, raw materials, commodities and services. We have executed over
6,800 online auctions for more than $10.5 billion worth of goods and services to
date, and created potential estimated savings of nearly $2.0 billion for our
customers. Since 1995, we have created online auctions for products in more than
150 supply verticals, and more than 7,000 suppliers from over 55 countries have
participated in our auctions.

DETERMINATION OF AUCTION VOLUME AND ACHIEVABLE SAVINGS

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

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

<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED         NINE MONTHS ENDED
                                      SEPTEMBER 30,             SEPTEMBER 30,
                                   -------------------        ------------------
                                    2000         1999         2000         1999
                                   ------        -----        -----        -----
<S>                                <C>           <C>          <C>          <C>
Auction volume (in millions)...    2,933          731         6,477        1,363
</TABLE>

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

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

                                        9
<PAGE>   10

REVENUES

     We generate revenues under service agreements with our customers. Our
service agreements typically provide us with revenues from fixed monthly fees,
and may also include performance incentive payments, based on volume and/or
savings. The revenue structure in a particular service agreement may vary,
depending upon the needs of our customer and the conventional practices in the
supply market where our customer obtains its materials, commodities or services.
The monthly fees that we receive are for the use of our technology, supplier and
supply market information, market making and market operations staff and
facilities. Negotiated monthly fees vary by customer, and reflect both the
anticipated auction volume and the staffing, expertise and technology we
anticipate committing to complete the services requested by our customers. For
the three and nine month periods ended September 30, 2000 and 1999, fixed
monthly fees constituted a majority of our revenues, and we expect that these
monthly fees will continue to constitute a majority of our revenues. We
recognize revenues from our fixed monthly fees ratably as we provide services.
Our agreements range in length from a few months to as many as five years. At
any given time, we have agreements of varying lengths with staggered
expirations. Some of our service agreements permit early termination by our
customers without penalty.

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

LIMITED OPERATING HISTORY

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

CUSTOMER CONCENTRATION

     We depend on United Technologies Corporation ("United Technologies") and
Visteon Corporation ("Visteon") for a material portion of our revenues. United
Technologies represented 10% and 11% of our revenues during the three and nine
months ended September 30, 2000 and 32% and 41% of our revenues during the three
and nine months ended September 30, 1999. In October 2000, we entered into a
three-year contract extension with United Technologies. We are also party to a
five-year agreement with Visteon that provides for a fixed monthly payment
stream larger than any other current customer contract. Visteon represented 11%
and 9% of our revenues during the three and nine months ended September 30,
2000. We anticipate that we will continue to diversify our base of customers by
adding new customers and increasing sales to existing customers, and that the
percentage of total revenues we derive from United Technologies and Visteon will
decrease.

RESULTS OF OPERATIONS

     Net loss for the three and nine months ended September 30, 2000 was $47.1
and $111.8 million, or $1.25 and $3.03 per diluted share. Excluding stock-based
expense and non-cash acquisition-related charges for goodwill amortization and
the write-off of in-process research and development, net loss for the three and
nine months ended September 30, 2000 was $12.3 and $33.5 million, or $.33 and
$.91 per diluted share. Exclusive of non-cash acquisition-related charges, the
impact of the acquisitions of iMark and Surplus Record was not material to the
Company's results of operations for the three and nine months ended September
30, 2000. Net loss for the three and nine months ended September 30, 1999 was
$9.7 and $13.5 million, or $.68 and $1.00 per

                                       10
<PAGE>   11

diluted share. The following table sets forth condensed consolidated statement
of operations data as a percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                            THREE MONTHS         NINE MONTHS
                                                                ENDED               ENDED
                                                            SEPTEMBER 30,       SEPTEMBER 30,
                                                           ---------------      --------------
                                                           2000       1999      2000      1999
                                                           -----      ----      ----      ----
<S>                                                        <C>        <C>       <C>       <C>
Revenues.................................................   100%       100%      100%      100%
Cost of revenues.........................................    54         60        56        57
                                                           ----       ----      ----      ----
     Gross profit........................................    46         40        44        43
Operating costs:
  Research and development...............................    20         30        23        23
  Sales and marketing....................................    44         59        52        43
  General and administrative.............................    37         47        40        45
  Stock-based expense....................................    20         88        17        36
  Goodwill amortization..................................   111         --       108        --
  Write-off of in-process research and development.......    --         --        13        --
                                                           ----       ----      ----      ----
     Operating loss......................................  (186)      (184)     (209)     (104)
Other income, net........................................     9          2        12         1
                                                           ----       ----      ----      ----
     Net loss............................................  (177%)     (182%)    (197%)    (103%)
                                                           ====       ====      ====      ====
</TABLE>

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

     All references to "Q3 2000" and "Q3 1999" are for the three months ended
September 30, 2000 and 1999, respectively. All references to "Nine Months 2000"
and "Nine Months 1999" are for the nine months ended September 30, 2000 and
1999, respectively.

  REVENUES

     Revenues increased 397% from $5.4 million in Q3 1999 to $26.6 million in Q3
2000 and increased 335% from $13.0 million in Nine Months 1999 to $56.8 million
in Nine Months 2000. The increase in revenues is primarily attributable to a
larger number of new customers for which we conducted auctions, as well as
increased use of our services by existing customers. The number of customers
served increased from 18 in Q3 1999 to 84 in Q3 2000. One additional indicator
of our market acceptance is the estimated dollar volume of materials,
commodities and services that we auction for our customers. Auction volume grew
from $730.6 million in Q3 1999 to $2.9 billion in Q3 2000 and from $1.4 billion
in Nine Months 1999 to $6.5 billion in Nine Months 2000.

  COST OF REVENUES

     Cost of revenues increased from $3.2 million in Q3 1999 to $14.3 million in
Q3 2000 and from $7.4 million in Nine Months 1999 to $31.6 million in Nine
Months 2000. As a percentage of revenues, cost of revenues decreased from 60% in
Q3 1999 to 54% in Q3 2000 and from 57% in Nine Months 1999 to 56% in Nine Months
2000. The increase in absolute dollar amounts from Q3 1999 to Q3 2000 and Nine
Months 1999 to Nine Months 2000 reflects an increase in the number of market
making staff to serve our growing customer base and the increased cost of our
operations due to the expansion of our office space and our services into
international locations.

     The decrease in cost of revenues as a percentage of revenues from Q3 1999
to Q3 2000 and from Nine Months 1999 to Nine Months 2000 is primarily the result
of increased staff productivity as our personnel became more specialized in
various market making activities. Also, we have attained some operating
efficiencies from our investments in information tools to automate portions of
our market making process. Although we will continue to invest in the growth of
our business, we expect gross margins to continue to increase in the future.

                                       11
<PAGE>   12

  OPERATING COSTS

     RESEARCH AND DEVELOPMENT. Research and development costs increased from
$1.6 million, or 30% of revenues in Q3 1999, to $5.3 million, or 20% of revenues
in Q3 2000, and from $3.0 million, or 23% of revenues in Nine Months 1999, to
$13.0 million, or 23% of revenues in Nine Months 2000. The increase in absolute
dollars relates primarily to an increase in the number of research and
development staff and associated costs for the continued development of our
BidWare software and other market making technology. We expect to increase our
research and development costs in absolute dollars in future periods to invest
in new technology for future product and service offerings and to adapt and add
features to our existing technology; however, we anticipate these costs will
continue to decrease as a percentage of revenues in the future. As a result of a
change in certain information technology initiatives, we recognized additional
depreciation and other charges of $1.6 million in Q3 2000 related to capitalized
software and other computer equipment.

     SALES AND MARKETING. Sales and marketing costs increased from $3.2 million,
or 59% of revenues in Q3 1999, to $11.7 million, or 44% of revenues in Q3 2000,
and from $5.6 million, or 43% of revenues in Nine Months 1999, to $29.3 million,
or 52% of revenues in Nine Months 2000. The increase in absolute dollars
reflects a significant ramp-up in sales and marketing staff, public relations
costs, trade shows and advertising as we pursued our brand and business
development strategy and accelerated our spending on potential future growth. We
expect to continue to increase our sales and marketing costs in absolute dollars
in future periods to promote our brand, to pursue our business development
strategy and to increase the size of our sales force; however, we anticipate
these costs will continue to decrease as a percentage of revenues in the future.

     GENERAL AND ADMINISTRATIVE. General and administrative costs increased from
$2.5 million in Q3 1999 to $9.9 million in Q3 2000 and from $5.9 million in Nine
Months 1999 to $23.0 million in Nine Months 2000. As a percentage of revenues,
general and administrative costs decreased from 47% in Q3 1999 to 37% in Q3 2000
and from 45% in Nine Months 1999 to 40% in Nine Months 2000. The increase in
absolute dollars is primarily attributable to the addition of personnel to our
general and administrative staff in the areas of technical operations, human
resources, legal, finance and facilities management. The increase is also
attributable to our continued investment in the infrastructure of our
international subsidiaries. We expect that general and administrative costs will
continue to increase in absolute dollars in future periods as we continue to add
staff and infrastructure to support our expected domestic and international
business growth and bear the increased costs associated with being a public
company; however, we anticipate these costs will continue to decrease as a
percentage of revenues in the future. As a result of our transition to a
globally-integrated enterprise resource planning ("ERP") system, we recognized
additional depreciation and other charges of $1.2 million in Q3 2000 related to
software and other computer equipment.

     STOCK-BASED EXPENSE. The Company recorded $2.0 million of unearned
stock-based compensation related to employee stock options granted in June and
July 1999, which will be amortized over a five-year period ending June 2004. In
Q3 1999 and Nine Months 1999, $226,000 was amortized related to these grants. In
Q3 2000 and Nine Months 2000, $127,000 and $578,000, respectively, was amortized
related to these grants. In September 1999, the Company recorded $4.5 million of
stock-based expense related to a warrant granted to a customer. In April 2000,
the Company also recorded $95.5 million of unearned stock-based expense related
to a warrant granted to a customer, which will be amortized over a five-year
period ending April 2005. In Q3 2000 and Nine Months 2000, $4.8 million and $8.7
million, respectively, was amortized related to this warrant. In April 2000, the
Company recorded $196,000 of unearned stock-based expense related to stock
options granted to a consultant, which will be amortized over a one-year period
ending March 2001. In Q3 2000 and Nine Months 2000, $49,000 and $98,000,
respectively, was amortized related to this grant. In September 2000, the
Company also recorded $314,000 of stock-based expense related to a modification
of stock options held by a former employee.

     GOODWILL AMORTIZATION. In connection with our acquisitions of iMark and
Surplus Record in March 2000, we recorded goodwill of $354.3 million, of which
$29.5 million and $61.2 million was amortized in Q3 2000 and Nine Months 2000,
respectively. We expect quarterly goodwill amortization related to these
acquisitions to be $29.5 million through the first quarter of 2003.

                                       12
<PAGE>   13

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

  OTHER INCOME, NET

     Other income was $120,000 in Q3 1999 compared to $2.3 million in Q3 2000
and $54,000 in Nine Months 1999 compared to of $6.6 million in Nine Months 2000.
The increase was primarily attributable to increased interest income from the
investment of proceeds from our initial public offering in December 1999 into
interest-bearing, investment grade securities.

LIQUIDITY AND CAPITAL RESOURCES

     We have historically satisfied our cash requirements primarily through a
combination of revenues, equity financing transactions and bank borrowings. In
December 1999, we closed our initial public offering, which resulted in net
proceeds of $182.2 million. As of September 30, 2000, we had cash and cash
equivalents of $52.5 million, short-term investments of $81.1 million and
working capital of $129.1 million.

     Net cash used in operating activities totaled $8.6 million in Nine Months
1999 and $29.7 million in Nine Months 2000. The use of cash in Nine Months 2000
related primarily to the operating loss generated by our investment in the
growth of our business, including an increase in personnel from 278 as of
September 30, 1999 to 806 as of September 30, 2000. In addition, in March 1999,
we began leasing a significantly larger corporate headquarters facility. The
lease, which runs through May 2010, currently requires an annual lease payment
of $3.7 million. Our lease payments will grow as we take additional office
space.

     Net cash used in investing activities totaled $14.9 million in Nine Months
1999 and $92.7 million in Nine Months 2000. Our use of cash in investing
activities in Nine Months 1999 and Nine Months 2000 resulted primarily from our
continued additions to and upgrade of computing and telecommunications
equipment. Also in Nine Months 2000, we used $48.1 million to purchase
short-term investments and $16.7 million related to acquisitions that closed in
March 2000.

     Net cash provided by financing activities totaled $44.1 million in Nine
Months 1999, while net cash used in financing activities totaled $2.3 million in
Nine Months 2000. The positive financing cash flows in Nine Months 1999
primarily reflect the net proceeds from the issuance of preferred stock, bank
borrowings and the exercise of stock options and warrants. In Nine Months 2000,
our negative financing cash flows primarily related to the repayment of iMark
debt assumed in the acquisition, partially offset by the exercise of stock
options.

     As of September 30, 2000, we had in place a $10.0 million bank credit
facility, consisting of a $5.0 million revolving line of credit, of which $4.7
million was available, and two equipment loans originally totaling $5.0 million,
of which $3.8 million was outstanding. In November 2000, we entered into a new
one-year bank credit facility consisting of a $20.0 million line of credit, $3.8
million of which was used to retire the facility in place as of September 30,
2000. Borrowings under the new facility bear interest at the lender's prime
rate.

     Both our previous and our current bank credit facilities contain
restrictive covenants, including a limitation on incurring additional
indebtedness and paying dividends. Both also include requirements as to minimum
tangible new worth and current and debt service ratios reported each month. We
have pledged substantially all of our tangible assets as collateral for the new
credit facility, as we had done for the facility previously in place.

     Capital expenditures were $4.4 million in Nine Months 1999 and $25.6
million in Nine Months 2000. Capital expenditures over these periods were
primarily made to purchase computer and telecommunications equipment and
furnishings in our new corporate headquarters and other offices, as well as to
expand our network and server capacity. In Nine Months 2000, we have been
implementing an ERP system that will more fully integrate our financial systems
and other operational reporting. This system went live in October 2000. We
funded these capital expenditures through a combination of sales of our equity
securities and bank borrowings. We intend to fund future capital expenditures
through a combination of proceeds from our initial public offering, bank
borrowings and cash from operations. As a result of the significant investments,
we have made in our operations, infrastructure and personnel in 2000, we
anticipate a decrease in our capital expenditures in future periods.
                                       13
<PAGE>   14

     We expect to experience growth in our operating costs for the foreseeable
future in order to execute our business plan, particularly in the areas of
research and development and sales and marketing. We also expect to open new
domestic and international offices in order to support the needs of our existing
and anticipated customers. As a result, we estimate that these operating costs,
as well as other planned expenditures, will constitute a significant use of our
cash resources. In addition, we may use cash resources to fund acquisitions of
complementary businesses and technologies. We believe that our current cash
resources will be sufficient to meet our working capital and capital
expenditures for at least the next 18 to 24 months. Thereafter, we may find it
necessary to obtain additional financing. In the event that additional financing
is required, we may not be able to raise it on terms acceptable to us, if at
all.

RECENT ACCOUNTING PRONOUNCEMENTS

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

     In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements". SAB No. 101 provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. We believe that the impact of SAB No. 101, which will be
effective in the fourth quarter of 2001, will not have a significant impact on
our consolidated financial statements.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

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

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

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

     Furthermore, in recent quarters, many industrial companies have announced
their intentions to establish their own business-to-business exchanges. Our
current customers or prospective customers may also establish their

                                       14
<PAGE>   15

own exchanges. These exchanges may provide auction functionality and other
services similar to ours and may diminish the need for our services. While we do
not know the effect that these exchanges may have on the market for online
auction services, it is possible that the existence of these exchanges, or even
the anticipated existence of planned exchanges, may result in our losing
customers and revenue and may impair our ability to grow our business.

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

     We depend on United Technologies and Visteon for a material portion of our
revenues. Revenue concentration from United Technologies was 10% in Q3 2000 and
32% in Q3 1999. In October 2000, we entered into a three-year contract extension
with United Technologies. United Technologies may terminate the agreement prior
to its expiration upon 30 days' notice.

     In April 2000, we entered into a five-year agreement with Visteon that
provides for a fixed monthly payment stream larger than any other current
customer contract. Although this agreement is not cancelable, it may be
terminated, subject to cure periods, in the event of a breach. Any termination
of our agreement with Visteon, whether or not permitted by the terms of the
agreement, would diminish our revenues and operating results. Revenue
concentration from Visteon was 11% in Q3 2000.

     In January 2000, General Motors, which had been a material customer,
notified us that it was exercising its right to terminate its agreement on 90
days' notice. The termination of this agreement became effective in April 2000.
Following our announcement of the termination of the General Motors contract,
which we made immediately upon receiving notification from General Motors of its
intention to terminate, our stock price decreased significantly. Loss of any
other significant customers could cause a similar decrease in our stock price.

THE INTEGRATION OF OUR RECENT ACQUISITIONS MAY INTERFERE WITH OUR OPERATIONS -

     In the first quarter of 2000, we consummated the acquisitions of iMark.com,
Inc., Surplus Record, Inc. and SR Auction, Inc. We are continuing to integrate
these entities, employees and business operations with ours. Certain risks we
face in this integration include:

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

     - difficulties in realizing potential operating synergies;

     - retention of new employees;

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

     - potential adverse effects on operating results.

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

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

     If appropriate opportunities present themselves, we may acquire additional
businesses, technologies, services or products that we believe are strategic,
and any such acquisitions may be material in size. We may not be able to
identify, negotiate or finance any future acquisition successfully. Even if we
do succeed in acquiring a business, technology, service or product, we have
limited experience in integrating an acquisition into our business. The process
of integration may produce unforeseen operating difficulties and expenditures
and may absorb significant attention of our management that would otherwise be
available for the ongoing development of our business. Moreover, we may never
achieve any of the benefits that we might anticipate from a future acquisition.
If we make future acquisitions, we may issue shares of stock that dilute other
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might harm our financial results and cause our stock price to decline. Any
financing that we might need for future acquisitions may only be available to us
on terms that restrict our business or that impose costs that reduce our net
income or increase our losses.
                                       15
<PAGE>   16

WE USE SIGNIFICANTLY MORE CASH THAN WE GENERATE

     Since our inception, our operating and investing activities have used more
cash than they have generated. Because we will continue to need substantial
amounts of working capital to fund the growth of our business, we expect to
continue to experience significant negative operating and investing cash flows
for the foreseeable future. We may need to raise additional capital in the
future to meet our operating and investing cash requirements. We may not be able
to find additional financing, if required, on favorable terms or at all. If we
raise additional funds through the issuance of equity, equity-related or debt
securities, these securities may have rights, preferences or privileges senior
to those of the rights of our common stock, and our stockholders may experience
additional dilution to their equity ownership.

WE ANTICIPATE FUTURE LOSSES

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

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

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

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

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

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

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

WE MAY NOT BE ABLE TO HIRE OR RETAIN QUALIFIED STAFF

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

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

     If we are unable to undertake new business due to a shortage of staff or
technology resources, our growth will be impeded. Our customers are typically
large enterprises. At times, these customers ask us to pursue

                                       16
<PAGE>   17

projects that put a strain on our resources, both in terms of people and
technology. At the same time, penetration of new product categories often
requires that we build up a significant database of new information. This, too,
often requires a substantial amount of time from our market making staff. If our
staff does not have the time to find and assimilate this new information, we may
not be able to extend our services to new product categories. Therefore, there
may be times when our opportunities for revenue growth may be limited by the
capacity of our internal resources rather than by the absence of market demand.

FAILURE TO MANAGE OUR GROWTH COULD REDUCE OUR REVENUES OR OPERATING RESULTS

     Rapid expansion strains our infrastructure, management, internal controls
and financial systems. We may not be able to effectively manage our present
growth or any future expansion. We have recently experienced significant growth,
with our revenues for Q3 2000 increasing 397% compared to Q3 1999. To support
our growth, we have hired the majority of our employees within the last year.
This rapid growth has also strained our ability to integrate and properly train
our new employees. Inadequate integration and training of our employees may
result in underutilization of our workforce and may reduce our revenues or
operating results.

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

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

     - budgeting constraints;

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

     - the strength of pre-existing supplier relationships;

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

     - an aversion to new purchasing methods.

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

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

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

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

     The actual savings achieved in any given auction vary widely and depend
upon many factors outside of our control. These factors include:
                                       17
<PAGE>   18

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

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

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

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

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

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

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

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

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

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

THE LOSS OF OUR KEY EXECUTIVES COULD DISRUPT OUR BUSINESS

     None of our executive officers or other key employees is bound by an
employment agreement. We rely on the leadership and vision of key members of our
senior management team and the loss of any of these executives could disrupt the
Company's growth.

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

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

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

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

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

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

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

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

     We cannot be certain that third parties will not infringe or misappropriate
our proprietary rights or that third parties will not independently develop
similar proprietary information. Any infringement, misappropriation or
independent development could harm our future financial results. In addition,
effective patent, trademark, copyright and trade secret protection may not be
available in every country where we do business. We may, at times, have to incur
significant legal costs and spend time defending our trademarks, copyrights and,
if issued, our patents. Any defense efforts, whether successful or not, would
divert both time and resources from the operation and growth of our business.

     There is also significant uncertainty regarding the applicability to the
Internet of existing laws regarding matters such as property ownership, patents,
copyrights and other intellectual property rights. Legislatures adopted the vast
majority of these laws prior to the advent of the Internet and, as a result,
these laws do not contemplate or address the unique issues of the Internet and
related technologies. We cannot be sure what laws and regulations may ultimately
affect our business or intellectual property rights.

OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS

     We do not believe that we infringe the proprietary rights of others, and to
date, no third parties have notified us of infringement, but we may be subject
to infringement claims in the future. The defense of any claims of infringement
made against us by third parties could involve significant legal costs and
require our management to divert time from our business operations. Either of
these consequences of an infringement claim could have a material adverse effect
on our operating results. If we are unsuccessful in defending any claims of
infringement, we may be forced to obtain licenses or to pay royalties to
continue to use our technology. We may not be able to obtain any necessary
licenses on commercially reasonable terms or at all. If we fail to obtain
necessary licenses or
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<PAGE>   20

other rights, or if these licenses are too costly, our operating results may
suffer either from reductions in revenues through our inability to serve
customers or from increases in costs to license third-party technology.

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

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

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

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

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

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

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

     The imposition of sales, value-added or similar taxes could diminish our
competitiveness and harm our business. We do not collect sales or other similar
taxes for goods purchased through our online auctions. Our customers are large
purchasing organizations that typically manage and pay their own sales and use
taxes. However, we may be subject to sales tax collection obligations in the
future.

OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS AND UNCERTAINTIES

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

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<PAGE>   21

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

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

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<PAGE>   22

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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<PAGE>   23

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

     As previously reported, ten securities fraud class action complaints were
filed against the Company and three executive officers in federal court in
Pittsburgh, Pennsylvania, which the court subsequently consolidated into a
single proceeding. On April 29, 2000, the lead plaintiffs filed a consolidated
amended complaint, which supersedes all of the earlier-filed complaints. The
consolidated amended complaint contains the same allegations as those asserted
in the earlier complaints. The Company and the individual defendants have filed
a motion seeking dismissal of the case on the ground that the allegations of the
consolidated amended complaint are, as a matter of law, insufficient to warrant
discovery and trial of the plaintiff's claim. The motion has been fully briefed
by the parties and awaits a decision by the court. The Company and the
individual defendants believe that the plaintiff's allegations are completely
without merit and they intend to vigorously defend the litigation.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER           DESCRIPTION
-------  ----------------------------
<S>      <C>
 27.1    Financial Data Schedule.
</TABLE>

(b) Reports on Form 8-K

     None.

                                  * * * * * *

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<PAGE>   24

                                   SIGNATURE

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Pittsburgh, Commonwealth of Pennsylvania on November 8, 2000.

                                          FREEMARKETS, INC.

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

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