<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                 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 JUNE 30, 2003

                                       OR

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

     FOR THE TRANSITION PERIOD FROM          TO

                          COMMISSION FILE NUMBER 000-27913

                                  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)

                            HTTP:WWW.FREEMARKETS.COM
                               (Registrant's URL)

     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 Exchange Act Rule 12b-2.  YES [X]  NO [ ]

     The number of shares of the registrant's common stock outstanding as of the
close of business on June 30, 2003 was 42,030,978.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                               FREEMARKETS, INC.

                                   FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                                     INDEX

<Table>
<Caption>
                                                                PAGE
                                                                ----
<S>                                                             <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
            Condensed Consolidated Balance Sheets as of June
            30, 2003 (unaudited) and December 31, 2002......      3
            Condensed Consolidated Statements of Operations
            for the three and six months ended June 30, 2003
            and 2002 (unaudited)............................      4
            Condensed Consolidated Statements of Cash Flows
            for the six months ended June 30, 2003 and 2002
            (unaudited).....................................      5
            Notes to Condensed Consolidated Financial
            Statements......................................      6

Item 2. Management's Discussion and Analysis of Financial
  Condition and Results of Operations.......................     12

Item 3. Quantitative and Qualitative Disclosures About
  Market Risk...............................................     19

Item 4. Controls and Procedures.............................     19

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings...................................     21

Item 4. Submission of Matters to a Vote of Security
  Holders...................................................     21

Item 6. Exhibits and Reports on Form 8-K....................     21

Signature...................................................     22
</Table>
<PAGE>

                        PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                       FREEMARKETS, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                ($ IN THOUSANDS)

<Table>
<Caption>
                                                               JUNE 30,      DECEMBER 31,
                                                                 2003           2002*
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................   $  93,256      $  94,593
  Short-term marketable investments.........................      26,234         25,323
  Accounts receivable, net..................................      22,660         25,673
  Other current assets......................................       7,638          8,457
                                                               ---------      ---------
     Total current assets...................................     149,788        154,046
Long-term marketable investments............................      10,045         15,107
Property and equipment, net.................................      14,656         20,159
Goodwill and other assets, net..............................       4,465          4,355
                                                               ---------      ---------
     Total assets...........................................   $ 178,954      $ 193,667
                                                               =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $   3,998      $   4,063
  Accrued incentive compensation............................       4,326          7,536
  Accrued restructuring charges.............................         426            119
  Other current liabilities.................................      18,642         21,608
  Current portion of long-term debt.........................       1,428          1,502
                                                               ---------      ---------
     Total current liabilities..............................      28,820         34,828
Accrued restructuring charges, net of current portion.......       2,462             --
Long-term debt..............................................         438          1,328
                                                               ---------      ---------
     Total liabilities......................................      31,720         36,156
                                                               ---------      ---------

Commitments and contingencies
Stockholders' equity:
  Common stock..............................................         420            424
  Additional capital........................................     582,676        575,043
  Unearned stock-based compensation.........................         (49)          (104)
  Stock purchase warrants...................................      76,388         76,388
  Accumulated other comprehensive loss......................        (200)            (1)
  Accumulated deficit.......................................    (512,001)      (494,239)
                                                               ---------      ---------
     Total stockholders' equity.............................     147,234        157,511
                                                               ---------      ---------
     Total liabilities and stockholders' equity.............   $ 178,954      $ 193,667
                                                               =========      =========
</Table>

---------------
* Summarized from audited December 31, 2002 balance sheet.

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

                       FREEMARKETS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<Table>
<Caption>
                                                              THREE MONTHS ENDED      SIX MONTHS ENDED
                                                                   JUNE 30,               JUNE 30,
                                                              ------------------    --------------------
                                                               2003       2002        2003        2002
                                                              -------    -------    --------    --------
<S>                                                           <C>        <C>        <C>         <C>
Revenues....................................................  $34,633    $44,604    $ 69,153    $ 87,777
                                                              -------    -------    --------    --------
Operating costs and expenses:
  Cost of revenues..........................................   17,749     19,322      36,148      38,182
  Research and development..................................    6,211      6,916      12,701      12,058
  Sales and marketing.......................................    9,976     10,928      19,345      23,912
  General and administrative................................    5,520      6,351      11,571      12,574
  Stock compensation and warrant costs......................    1,989      2,010       3,978       4,019
  Investment write-down.....................................       --         --          --       4,740
  Restructuring charge......................................       --         --       4,719          --
                                                              -------    -------    --------    --------
Total operating costs and expenses..........................   41,445     45,527      88,462      95,485
                                                              -------    -------    --------    --------
    Operating loss..........................................   (6,812)      (923)    (19,309)     (7,708)
Interest and other income, net..............................    1,065      1,029       2,054       1,776
                                                              -------    -------    --------    --------
    (Loss) income before taxes and change in accounting.....   (5,747)       106     (17,255)     (5,932)
Provision for income taxes..................................      216        193         507         346
                                                              -------    -------    --------    --------
    Loss before change in accounting........................   (5,963)       (87)    (17,762)     (6,278)
Cumulative effect of accounting change for goodwill.........       --         --          --      (5,327)
                                                              -------    -------    --------    --------
    Net loss................................................  $(5,963)   $   (87)   $(17,762)   $(11,605)
                                                              =======    =======    ========    ========
Basic and diluted earnings per share before accounting
  change....................................................  $ (0.14)   $ (0.00)   $  (0.42)   $  (0.15)
                                                              =======    =======    ========    ========
Basic and diluted earnings per share after accounting
  change....................................................  $ (0.14)   $ (0.00)   $  (0.42)   $  (0.28)
                                                              =======    =======    ========    ========
Shares used in computing basic and diluted earnings per
  share.....................................................   41,705     41,396      41,851      41,144
                                                              =======    =======    ========    ========
</Table>

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

                       FREEMARKETS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (UNAUDITED; $ IN THOUSANDS)

<Table>
<Caption>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              -------------------
                                                                2003       2002
                                                              --------   --------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(17,762)  $(11,605)
  Adjustments to reconcile net loss to net cash from
     operating a activities:
  Depreciation and amortization.............................     7,082      9,739
  Provision for bad debts...................................     1,044        415
  Stock compensation and warrant costs......................     3,978      4,019
  Investment write-down.....................................        --      4,740
  Cumulative effect of accounting change for goodwill.......        --      5,327
  Non-cash restructuring costs..............................        89         --
Cash from changes in:
  Accounts receivable.......................................     1,031        746
  Other assets..............................................       687       (622)
  Accounts payable..........................................       (65)       573
  Other liabilities.........................................    (3,441)    (5,677)
                                                              --------   --------
       Net cash from operating activities...................    (7,357)     7,655
                                                              --------   --------
Cash flows from investing activities:
  Purchases of marketable investments.......................   (26,058)   (18,303)
  Maturities of marketable investments......................    30,044         --
  Capital expenditures, net.................................    (1,646)    (2,396)
                                                              --------   --------
       Net cash from investing activities...................     2,340    (20,699)
                                                              --------   --------
Cash flows from financing activities:
  Repayment of debt.........................................    (1,464)      (787)
  Proceeds from debt........................................       500         --
  Proceeds from customer fees applied to warrant............     6,563      7,500
  Proceeds from issuance of common stock....................     1,040      2,202
  Payments to acquire and retire stock......................    (3,581)        --
  Options exercised.........................................       622      3,122
                                                              --------   --------
       Net cash from financing activities...................     3,680     12,037
                                                              --------   --------
Net change in cash and cash equivalents.....................    (1,337)    (1,007)
Cash and cash equivalents at beginning of period............    94,593     80,482
                                                              --------   --------
Cash and cash equivalents at end of period..................  $ 93,256   $ 79,475
                                                              ========   ========
Supplemental non-cash disclosure:
  Amounts due from customer characterized as payment for
     warrant................................................  $  1,875   $  1,875
                                                              ========   ========
</Table>

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

                       FREEMARKETS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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, 2003. 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, 2002, included in the Company's Annual Report on Form 10-K filed
with the SEC on March 14, 2003.

NOTE 2.  EARNINGS PER SHARE

     The following table presents the calculation of basic and diluted earnings
per share:

<Table>
<Caption>
                                    THREE MONTHS ENDED      SIX MONTHS ENDED
                                         JUNE 30,               JUNE 30,
                                    ------------------    --------------------
                                     2003       2002        2003        2002
                                    -------    -------    --------    --------
<S>                                 <C>        <C>        <C>         <C>
Loss before change in
  accounting......................  $(5,963)   $   (87)   $(17,762)   $ (6,278)
  Cumulative effect of accounting
     change for goodwill..........       --         --          --      (5,327)
                                    -------    -------    --------    --------
Net loss..........................  $(5,963)   $   (87)   $(17,762)   $(11,605)
                                    =======    =======    ========    ========
Weighted average common shares
  used in computing basic and
  diluted earnings per share......   41,705     41,396      41,851      41,144
Basic and diluted earnings per
  share before accounting
  change..........................  $ (0.14)   $ (0.00)   $  (0.42)   $  (0.15)
Basic and diluted earnings per
  share after accounting change...  $ (0.14)   $ (0.00)   $  (0.42)   $  (0.28)
</Table>

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

<Table>
<Caption>
                                                        THREE MONTHS ENDED      SIX MONTHS ENDED
                                                             JUNE 30,               JUNE 30,
                                                        ------------------      ----------------
                                                         2003        2002       2003       2002
                                                        ------      ------      -----      -----
<S>                                                     <C>         <C>         <C>        <C>
Stock options.........................................  2,780       3,980       3,455      4,755
</Table>

                                        6
<PAGE>
                       FREEMARKETS, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
              (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

     The following table illustrates the effect on earnings per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation":

<Table>
<Caption>
                                 THREE MONTHS ENDED         SIX MONTHS ENDED
                                      JUNE 30,                  JUNE 30,
                                ---------------------     ---------------------
                                  2003         2002         2003         2002
                                --------     --------     --------     --------
<S>                             <C>          <C>          <C>          <C>
Net loss, as reported.........  $ (5,963)    $    (87)    $(17,762)    $(11,605)
Add: Stock-based employee
  compensation expense
  included in reported net
  income......................        27           47           55           95
Less: Total stock-based
  employee compensation
  expense determined under
  fair value method for all
  awards......................    (9,390)     (13,283)     (18,753)     (26,567)
                                --------     --------     --------     --------
Pro forma net loss............  $(15,326)    $(13,323)    $(36,460)    $(38,077)
                                ========     ========     ========     ========
Earnings per share:
As reported...................  $  (0.14)    $  (0.00)    $  (0.42)    $  (0.15)
Pro forma.....................  $  (0.37)    $  (0.32)    $  (0.87)    $  (0.93)
</Table>

     The weighted average fair value per option grant to employees was $4.94 and
$9.79 in Q2 2003 and Q2 2002, respectively, and $3.62 and $10.58 in the six
months ended June 30, 2003 and 2002 respectively. The fair value of each option
grant was determined using the Black-Scholes pricing model, with the following
assumptions for all grants:

<Table>
<Caption>
                                          THREE MONTHS ENDED    THREE MONTHS ENDED
                                               JUNE 30,             MARCH 31,
                                          ------------------    ------------------
                                          2003         2002     2003         2002
                                          -----        -----    -----        -----
<S>                                       <C>          <C>      <C>          <C>
Weighted average risk-free interest
  rate..................................   3.0%        5.25%    4.75%        5.25%
Expected life (number of years).........   6.3          5.2      6.5          5.2
Volatility..............................   100%         100%     120%         100%
</Table>

NOTE 3.  STOCKHOLDERS' EQUITY

COMMON STOCK REPURCHASE PROGRAM

     In January 2003, the Board of Directors of the Company authorized the
repurchase of up to 15% of the Company's outstanding common stock from time to
time on the open market or in one or more negotiated transactions. As of June
30, 2003, the Company had purchased 853,500 shares at a weighted average cost of
$4.23 per share.

                                        7
<PAGE>
                       FREEMARKETS, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
              (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

COMPREHENSIVE LOSS

     The components of comprehensive loss were as follows:

<Table>
<Caption>
                                 THREE MONTHS ENDED         SIX MONTHS ENDED
                                      JUNE 30,                  JUNE 30,
                                 ------------------      ----------------------
                                  2003        2002         2003          2002
                                 -------      -----      --------      --------
<S>                              <C>          <C>        <C>           <C>
Net loss.......................  $(5,963)     $ (87)     $(17,762)     $(11,605)
Change in unrealized value on
  investments, net.............      (25)       172          (163)           40
Translation adjustment, net....       27       (470)          (36)         (450)
                                 -------      -----      --------      --------
                                 $(5,961)     $(385)     $(17,961)     $(12,015)
                                 =======      =====      ========      ========
</Table>

     The components of accumulated comprehensive income (loss) were as follows:

<Table>
<Caption>
                                                      JUNE 30,      DECEMBER 31,
                                                        2003            2002
                                                      --------      ------------
                                                            (IN THOUSANDS)
<S>                                                   <C>           <C>
Unrealized (losses) gains on investments, net.......   $(115)           $ 48
Cumulative translation adjustments..................     (85)            (49)
                                                       -----            ----
                                                       $(200)           $ (1)
                                                       =====            ====
</Table>

NOTE 4.  INVESTMENT WRITE-DOWN

     During Q1 2002, the Company recorded a $4.7 million loss on its investment
in Adexa, Inc. ("Adexa") based on Adexa's financial condition. The Company
concluded that there was an other than temporary decline in the value of its
investment in Adexa. As of June 30, 2003, the remaining book value of the
original $6.0 million investment in Adexa was $889,000.

NOTE 5.  ACCRUED RESTRUCTURING COSTS

2003 RESTRUCTURING PLAN

     In Q1 2003, in response to the continued economic slowdown, the Company
executed a restructuring plan resulting in the elimination of 79 positions in
its global workforce. The estimated liability for employee severance and
termination benefit costs will be paid by the end of Q3 2003. Additionally, the
Company evaluated its office space in Pittsburgh, Pennsylvania, and ceased using
one of the floors it leases through May 2010 in its global headquarters. In
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," the Company recorded a restructuring charge of $4.7
million in Q1 2003, covering these severance and lease costs.

                                        8
<PAGE>
                       FREEMARKETS, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
              (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

     The restructuring reserve activity under the Q1 2003 restructuring plan for
the period ended June 30, 2003 was:

<Table>
<Caption>
                                                                           BALANCE AT
                                    INITIAL CHARGE    AMOUNTS UTILIZED    JUNE 30, 2003
                                    --------------    ----------------    -------------
<S>                                 <C>               <C>                 <C>
Employee severance and termination
  benefit costs...................      $1,754             $1,664            $   90
Lease costs.......................       2,876                 89             2,787
Asset write-offs..................          89                 89                --
                                        ------             ------            ------
Total.............................      $4,719             $1,842             2,877
                                        ======             ======
Less current portion..............                                              415
                                                                             ------
Restructuring accrual, net of
  current portion.................                                           $2,462
                                                                             ======
</Table>

2001 RESTRUCTURING PLAN

     In April 2001, the Company closed its Austin, Texas office, formerly the
headquarters of its iMark.com, Inc. ("iMark") subsidiary, and centralized the
Company's asset recovery operations at its corporate headquarters in Pittsburgh,
Pennsylvania. As a result of the closing of the Austin office, the Company
recorded a $3.1 million restructuring charge covering the severance costs, lease
termination costs and non-cash write-off of assets related to the Austin office.
In June 2001, the Company closed two foreign offices and terminated certain
employees in those and other offices. As a result, the Company recorded a $3.3
million restructuring charge covering severance and lease termination costs. As
of June 30, 2003, substantially all amounts under this plan have been paid.

NOTE 6.  CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR GOODWILL

     The Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets", on January 1, 2002, and no longer records goodwill
amortization. In connection with adopting this standard, the Company completed
step one of the test for impairment, which indicated that the carrying value of
Surplus Record, which was acquired by the Company in March 2000 for $18.0
million in cash, exceeded its estimated fair value, as determined utilizing
various valuation techniques including discounted cash flow and comparative
market analysis. Thereafter, given the indication of a potential impairment, the
Company completed step two of the test. Based on that analysis, a transitional
impairment loss of $5.3 million was recognized in Q1 2002 as a cumulative effect
of an accounting change.

NOTE 7.  STOCK COMPENSATION AND WARRANT COSTS

     Stock compensation and warrant costs include charges resulting from stock
options and warrants granted at exercise prices less than fair value. The
following table shows the amounts of stock compensation and warrant costs by
category had stock compensation and warrant costs been separately stated on the
condensed consolidated statements of operations:

<Table>
<Caption>
                                          THREE MONTHS ENDED    SIX MONTHS ENDED
                                               JUNE 30,             JUNE 30,
                                          ------------------    ----------------
                                           2003       2002       2003      2002
                                          -------    -------    ------    ------
<S>                                       <C>        <C>        <C>       <C>
Research and development................  $    5     $   30     $   10    $   60
Sales and marketing.....................   1,984      1,980      3,968     3,959
                                          ------     ------     ------    ------
                                          $1,989     $2,010     $3,978    $4,019
                                          ======     ======     ======    ======
</Table>

                                        9
<PAGE>
                       FREEMARKETS, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
              (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 8.  RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting
for Contingencies" relating to a guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45 also requires enhanced
disclosures in a company's interim and annual filings. FIN 45 is effective for
guarantees issued or modified after December 31, 2002. The disclosure
requirements were effective for financial statements of both interim and fiscal
years ending after December 15, 2002. The adoption of this standard did not have
a material impact on the Company's consolidated financial statements.

     In January 2003, the EITF released Issue No. 00-21 ("EITF 00-21"), "Revenue
Arrangements with Multiple Deliverables," which addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses whether an
arrangement contains more than one unit of accounting and the measurement and
allocation to the separate units of accounting in the arrangement. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company adopted this standard effective January 1,
2003, and it did not have a material impact on its consolidated financial
statements.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133
by requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this Statement (1) clarifies under what circumstances
a contract with an initial net investment meets the characteristic of a
derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a
derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (4) amends certain other existing pronouncements.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. In addition, except as stated below, all provisions of SFAS No. 149
should be applied prospectively. The provisions of SFAS No. 149 that relate to
SFAS No. 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, paragraphs 7(a) and 23(a),
which relate to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing contracts
and new contracts entered into after June 30, 2003. The Company does not expect
this standard will have a material impact on its consolidated financial
statements.

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS No. 150 is effective for contracts entered into
or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of SFAS No. 150 should be applied prospectively. The
provisions of this Statement that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company does not expect this standard will have a
material impact on its consolidated financial statements.

                                        10
<PAGE>
                       FREEMARKETS, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
              (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 9.  SECURITIES CLASS ACTION COMPLAINTS

     Since April 27, 2001, eleven securities fraud class action complaints have
been filed against the Company and two executive officers in federal court in
Pittsburgh, Pennsylvania. The complaints, all of which assert the same claims,
stem from the Company's announcement on April 23, 2001 that, as a result of
discussions with the SEC, the Company was considering amending its 2000
financial statements for the purpose of reclassifying fees earned by the Company
under a service contract with Visteon. All of the cases have been consolidated
into a single proceeding. On October 30, 2001, the Company filed a motion
seeking to dismiss all of the cases in their entirety. On January 17, 2003, the
Court denied the motion to dismiss. The case is now in the class certification
phase. In addition, on September 24, 2001, an individual claiming to be a
FreeMarkets shareholder filed a shareholder's derivative action, nominally on
behalf of FreeMarkets, against all of the Company's directors and certain of its
executive officers. FreeMarkets is also named as a nominal defendant. The suit
is based on the same facts alleged in the foregoing securities fraud class
actions and was stayed pending a ruling on the Company's motion to dismiss those
class actions. The Company believes that the plaintiffs' allegations are without
merit and it intends to defend these claims vigorously.

     Since July 31, 2001, several securities fraud class action complaints have
been filed in the United States District Court for the Southern District of New
York alleging violations of the securities laws in connection with the Company's
December 1999 initial public offering ("IPO"). In four of the complaints, the
Company and certain of its officers are named as defendants, together with the
underwriters that are the subject of the plaintiffs' allegations. Each of these
cases has been consolidated for pretrial purposes into an earlier lawsuit
against the underwriters of the Company's IPO. In addition, the cases have been
consolidated for pretrial purposes with approximately 1,000 other lawsuits filed
against other issuers, their officers, and underwriters of their initial public
offerings. On April 19, 2002, a consolidated amended class action complaint (the
"Consolidated Complaint") was filed. The Consolidated Complaint alleges claims
against the Company and seven of its officers and/or directors, as well as seven
investment banking firms who either served as underwriters or are successors in
interest to underwriters of the Company's IPO. The Consolidated Complaint
alleges that the prospectus used in the Company's IPO contained material
misstatements or omissions regarding the underwriters' allocation practices and
compensation in connection with the IPO, and also alleges that the underwriters
manipulated the aftermarket for the Company's stock. Damages in an unspecified
amount are sought, together with interest, costs and attorney's fees. The
defendants filed a motion to dismiss the Consolidated Complaint. By stipulation
and order dated October 9, 2002, the individual defendants were dismissed
without prejudice from the Consolidated Complaint. On February 19, 2003, the
court denied the Company's motion to dismiss. On June 25, 2003, a Special
Committee of the Board of Directors of the Company approved a proposed
settlement of the litigation under terms set forth in a Memorandum of
Understanding and authorized the Company to enter into a definitive settlement
agreement to be prepared in accordance with the Memorandum of Understanding. The
anticipated settlement will be subject to court approval following notice to
class members and a fairness hearing. Based on the memorandum of understanding,
the Company believes that the anticipated settlement will have no material
effect on the Company.

                                        11
<PAGE>

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 constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements to be materially different than any expressed or implied by
these forward-looking statements. 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. Furthermore, in addition to the risks described in this Form 10-Q,
we are subject to specific risks and uncertainties related to our business
model, strategies, markets and legal and regulatory environment. For a detailed
discussion of some of these risks, please see the risk factors included in our
Annual Report on Form 10-K for the year ended December 31, 2002, as filed with
the SEC on March 14, 2003.

OVERVIEW

     FreeMarkets provides software, services and information to help companies
improve their sourcing and supply management processes and enhance the
capabilities of their supply management organization. Our customers are buyers
of industrial parts, raw materials, commodities and services. Our team members
provide service to customers in more than 35 languages from 19 locations in 15
countries on five continents.

     Since our inception, FreeMarkets has provided software and services to help
companies identify savings, enhance their sourcing efficiency and achieve their
strategic sourcing goals by enabling them to source goods and services in our
online markets. In providing these services we work with our customers to
identify and screen suppliers and to assemble a request for quotation that
provides detailed, clear and consistent information for suppliers to use in our
online markets. Our web-based technology enables suppliers from around the world
to submit bids for a customers' purchase orders in real-time interactive
competition featuring "downward price" dynamic bidding. While we have provided
this technology-enhanced service to buyers since 1995, we began to describe it
using the "FullSource" name in 2001. In 2001, we also introduced our QS
solution, which enables customers to conduct their own sourcing projects,
including running their own online markets. During the second half of 2002, we
introduced a number of new product offerings to expand our solutions beyond
sourcing to address a broader set of supply management activities. Our
development of a broader set of solutions in 2002 is part of a strategic
transition from a company that offers a single technology-enhanced service to
one with multiple software and service solutions. These activities include
supply analysis and strategy, spend requirements management, sourcing, supplier
development and supplier relationship management. We refer to these activities
as Global Supply Management, or GSM.

     Our solutions combine software, services and information to address the GSM
market. These solutions are ultimately designed to help companies lower costs
and reduce their supply risks.

RECENT DEVELOPMENTS

     We are considering closing our Brussels office and moving operations to
regional locations throughout Europe, as well as the United States and Asia. We
believe that the proposed changes will allow us to better serve our customers
and enable us to create a more leveraged, profitable and efficient business
across Europe. If we decide to implement the proposed restructuring plan, we
expect that we would record a restructuring charge in the range of $6 million to
$8 million in the third and/or fourth quarters to cover severance payments,
remaining lease obligations and asset write-offs. If the restructuring plan is
implemented, we expect that we would generate significant operational savings
which we currently estimate to be approximately $5 million per year.

                                        12
<PAGE>

CRITICAL ACCOUNTING POLICIES

     The accompanying discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP"). The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. These estimates form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. We base our estimates and judgments
on historical experience and all available information. However, future events
are subject to change, and the best estimates and judgments routinely require
adjustment. US GAAP requires us to make estimates and judgments in several
areas, including those related to recording various accruals (such as incentive
compensation and restructuring costs), income taxes, the useful lives of
long-lived assets such as property and equipment and potential losses from
contingencies and litigation. We believe the policies discussed below are the
most critical to our financial statements because they are affected
significantly by management's judgments, assumptions and estimates.

REVENUE RECOGNITION

     We generate revenues under service and access agreements with our
customers. While the vast majority of our agreements contain standard business
terms and conditions, there are many agreements that contain complex terms and
conditions. As a result, we are required to evaluate the scope and significance
of contract provisions in order to determine the appropriate accounting. In
addition, our revenue recognition policy requires an assessment as to whether
the collectibility is probable, which inherently requires us to evaluate the
creditworthiness of our customers.

     Our FullSource service agreements typically provide revenues from fixed
monthly fees, and may also include performance incentive payments based on
volume and/or savings. The 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 fees that we receive are for the use of our technology, supplier and supply
market information, sourcing operations staff and facilities. Negotiated fees
vary by customer, and reflect both the anticipated volume and the staffing,
expertise and technology we anticipate committing to complete the services
requested by our customers. We recognize revenues from our fixed monthly
FullSource fees ratably as we provide access to our services over the related
contract period. 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 agreements permit early termination without
cause by our customers without penalty.

     Many of the service agreements for our FullSource offering include
performance incentive payments that are contingent upon our customer achieving
specific volumes and/or savings, as set forth in the respective agreements. We
recognize these revenues as the thresholds are achieved. If our FullSource
market volume grows, the revenues attributable to these incentive payments may
also grow in terms of absolute dollars, but not necessarily as a percentage of
revenues.

     The agreements for our QS offering provide for revenues from fixed monthly
access fees. The fees that we receive are for providing access to our technology
and for add-on services. Negotiated access fees for our QS offering vary by
customer, and reflect the anticipated number of customer users and add-on
services. We recognize revenues from our QS offering as we provide access or
add-on services.

     The agreements for our new offerings, such as ES, Spend Visibility and
Supplier Implementation provide for revenues from fixed monthly access fees. The
fees that we receive are for providing access to our technology and for certain
services. We recognize revenues from these new offerings as we provide access or
services.

     Reimbursements, including those related to travel and other out-of-pocket
expenses, are included in revenues, and an equivalent amount of reimbursable
expenses are included in cost of revenues.

     Some customer agreements include multiple product and / or service
offerings. In determining the appropriate amount of revenue to be recognized for
each offering, the Company evaluates whether the offerings
                                        13
<PAGE>

have stand alone value to the customer, whether the fair value of the
undelivered elements is reliably determinable, and whether delivery of the
remaining offerings is probable and within the Company's control. In instances
where all of these conditions are satisfied, the Company recognizes revenue for
the offerings that have been delivered to the customer based on their relative
fair values.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

     We evaluate the collectibility of our accounts receivable based on a
combination of factors. In cases where we are aware of circumstances that may
impair a specific customer's ability to meet its financial obligations to us, we
record a specific allowance against amounts due to us. For all customers, we
recognize allowance for doubtful accounts based on the length of time the
receivables are past due, the current business environment and our historical
experience. If the financial condition of our customers deteriorates or if the
economic conditions worsen, additional allowances may be required in the future.

STOCK COMPENSATION

     SFAS No. 123, "Accounting for Stock-Based Compensation" gives companies the
option to adopt the fair value method for expense recognition of employee stock
options or to continue to account for employee stock options using the intrinsic
value method, as outlined under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees". We have elected to continue to
apply the intrinsic value method to account for employee stock options and
disclose the pro forma effect as if the fair value method had been applied in
the Notes to our consolidated financial statements.

TREATMENT OF VISTEON FEES

     In April 2000, we entered into a five-year agreement with Visteon that
provides for fixed monthly fees in return for our FullSource software and
services. We exclude from revenues the amounts that we earn under this contract;
however, cost of revenues includes the costs we incur in serving Visteon. At the
time we executed this service contract, we granted a warrant for 1.75 million
shares to Visteon with an exercise price of $.01 per share, and we continue to
receive ongoing marketing and public relations benefits as a result of our
relationship with Visteon. The warrant was valued at $95.5 million using the
Black-Scholes pricing model at the date of the grant in April 2000. As a result
of a review by the Securities and Exchange Commission ("SEC"), we exclude from
our revenues the fees we earn from this contract, and we allocate those fees as
payment for the warrant. However, we view our relationship with Visteon as a
typical customer relationship. We provide Visteon with access to software,
services and information to help them improve their sourcing and supply
management processes and enhance the capabilities of their supply management
organization. For all business and operational purposes in which revenue is a
factor in the decision, including budgets, forecasts, allocation of resources,
sales compensation, bonus decisions and other performance indicators (such as
DSO), we treat the fees we earn from this contract in the same manner as
revenues from other customers. Accordingly, we have referred, where applicable,
to "revenues and fees" throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations in order to accurately describe
our analysis of our operations.

     Below is a reconciliation of revenues under generally accepted accounting
principles with revenues plus the fees we earn under our service contract with
Visteon:

<Table>
<Caption>
                                         THREE MONTHS ENDED    SIX MONTHS ENDED
                                              JUNE 30,             JUNE 30,
                                         -------------------   -----------------
                                           2003       2002      2003      2002
                                         --------   --------   -------   -------
<S>                                      <C>        <C>        <C>       <C>
Revenues and fees......................  $37,445    $47,416    $74,778   $93,402
Less fees characterized as payment for
  warrant..............................   (2,812)    (2,812)    (5,625)   (5,625)
                                         -------    -------    -------   -------
Revenues...............................  $34,633    $44,604    $69,153   $87,777
                                         =======    =======    =======   =======
</Table>

     Our relationship with Visteon is a standard customer relationship (except
for the warrant). We do not expect to recognize revenues under this Visteon
service contract from the fees we earn during the term of the contract,

                                        14
<PAGE>

which expires in 2005, because we have determined, as a result of a review by
the SEC, that we must allocate those fees as payment for the warrant that we
granted to Visteon.

RESULTS OF OPERATIONS

     The following table sets forth condensed consolidated statements of
operations data as a percentage of revenues for the periods indicated:

<Table>
<Caption>
                                                        THREE MONTHS ENDED     SIX MONTHS ENDED
                                                             JUNE 30,              JUNE 30,
                                                        ------------------     -----------------
                                                        2003         2002      2003         2002
                                                        -----        -----     ----         ----
<S>                                                     <C>          <C>       <C>          <C>
Revenues..............................................   100%         100%     100%         100%
Operating costs and expenses:
  Cost of revenues,...................................    51           43       52           44
  Research and development............................    18           16       18           14
  Sales and marketing.................................    29           25       28           27
  General and administrative..........................    16           14       17           14
  Stock compensation and warrant costs................     6            4        6            5
  Investment write-down...............................    --           --       --            5
  Restructuring charges...............................    --           --        7           --
                                                         ---          ---      ---          ---
     Operating loss...................................   (20)          (2)     (28)          (9)
Interest and other income, net........................     3            2        3            2
                                                         ---          ---      ---          ---
     (Loss) / income before taxes and change in
       accounting.....................................   (17)           0      (25)          (7)
Provision for income taxes............................     0            0        1            0
                                                         ---          ---      ---          ---
     Loss before change in accounting.................   (17)          (0)     (26)          (7)
Cumulative effect of accounting change for goodwill...    --           --       --           (6)
                                                         ---          ---      ---          ---
     Net loss.........................................   (17%)         (0%)    (26%)        (13%)
                                                         ===          ===      ===          ===
</Table>

THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002

     All references to "Q2 2003" and "Q2 2002" are for the three months ended
June 30, 2003 and 2002, respectively. All references to "Six Months 2003" and
"Six Months 2002" are for the six months ended June 30, 2003 and 2002,
respectively.

  REVENUES

     Revenues decreased 22% from $44.6 million in Q2 2002 to $34.6 million in Q2
2003, and decreased 21% from $87.8 million in Six Months 2002 to $69.2 million
in Six Months 2003. As discussed earlier in "Treatment of Visteon Fees", we
exclude from revenues the fees earned from our contract with Visteon, which were
$2.8 million in each of Q2 2002 and Q2 2003, and $5.6 million in each of Six
Months 2002 and Six Months 2003. Revenues and fees decreased 21% from $47.4
million in Q2 2002 to $37.4 million in Q2 2003 and decreased 20% from $93.4
million in Six Months 2002 to $74.8 million in Six Months 2003. The decrease in
revenues is due to a combination of factors, including a change in the mix of
products and services deployed by our customers, as well as the continued weak
economic environment which we believe has caused our customers to defer their
purchasing decisions. In 2002, several large customers renewed their FullSource
access and service agreements at lower market volumes than the volumes provided
in previously existing agreements, resulting in lower revenues from our
FullSource offering in 2003. In addition, with the introduction of QS in early
2001, several FullSource-only customers have expanded their use of our products
to include a broader mix of FullSource, QS and related services. As customers
gain experience with our sourcing solutions, certain entities have migrated a
portion of their sourcing requirements to our self-service technologies. In some
cases, increased sales of additional products and services to existing customers
have resulted in lower total revenues due to this migration. We do not believe
that sales of new products in 2003 will compensate for the reduction in revenue
from our FullSource offering, and anticipate that total revenues in 2003 will be
less than 2002. We do expect that

                                        15
<PAGE>

the continued introduction of new products and services over the long-term will
drive customer acquisition, market share expansion and overall revenue gains.

     The following is a breakdown of revenues by product (in thousands):

<Table>
<Caption>
                          THREE MONTHS ENDED     THREE MONTHS ENDED      SIX MONTHS ENDED       SIX MONTHS ENDED
                            JUNE 30, 2003          JUNE 30, 2002          JUNE 30, 2003          JUNE 30, 2002
                         --------------------   --------------------   --------------------   --------------------
                            $      % OF TOTAL      $      % OF TOTAL      $      % OF TOTAL      $      % OF TOTAL
                         -------   ----------   -------   ----------   -------   ----------   -------   ----------
<S>                      <C>       <C>          <C>       <C>          <C>       <C>          <C>       <C>
FullSource.............  $24,001       69%      $36,259       81%      $49,401       71%      $72,794       83%
All other..............   10,632       31         8,345       19        19,752       29        14,983       17
                         -------      ---       -------      ---       -------      ---       -------      ---
Total revenues.........  $34,633      100%      $44,604      100%      $69,153      100%      $87,777      100%
                         =======      ===       =======      ===       =======      ===       =======      ===
</Table>

     The following is a breakdown of revenues and fees by product (in
thousands):

<Table>
<Caption>
                          THREE MONTHS ENDED     THREE MONTHS ENDED      SIX MONTHS ENDED       SIX MONTHS ENDED
                            JUNE 30, 2003          JUNE 30, 2002          JUNE 30, 2003          JUNE 30, 2002
                         --------------------   --------------------   --------------------   --------------------
                            $      % OF TOTAL      $      % OF TOTAL      $      % OF TOTAL      $      % OF TOTAL
                         -------   ----------   -------   ----------   -------   ----------   -------   ----------
<S>                      <C>       <C>          <C>       <C>          <C>       <C>          <C>       <C>
FullSource.............  $26,813       72%      $39,071       82%      $55,026       74%      $78,419       84%
All other..............   10,632       28         8,345       18        19,752       26        14,983       16
                         -------      ---       -------      ---       -------      ---       -------      ---
Total revenues and
  fees.................  $37,445      100%      $47,416      100%      $74,778      100%      $93,402      100%
                         =======      ===       =======      ===       =======      ===       =======      ===
</Table>

  OPERATING COSTS AND EXPENSES

     COST OF REVENUES.  Cost of revenues decreased from $19.3 million in Q2 2002
to $17.7 million in Q2 2003, and decreased from $38.2 million in Six Months 2002
to $36.1 million in Six Months 2003. The increase in cost of revenues as a
percentage of revenues was primarily the result of the 22% and 21% decrease in
revenues from Q2 2002 to Q2 2003 and Six Months 2002 and Six Months 2003,
respectively, and an increase in bad debt expense of $629,000 from Six Months
2002 to Six Months 2003, due to the write-off of approximately $740,000 due from
a single customer. The decrease in terms of absolute dollars in both periods is
attributable to lower customer out-of-pocket costs and reduced overhead,
primarily due to a decrease in depreciation expense in 2003 compared to
2002,partially offset by an increase in bad debt expense. Cost of revenues
includes the costs we incur in performing our obligations under the Visteon
service contract, even though the fees we earn under that contract are excluded
from revenues. We expect our cost of revenues in fiscal year 2003 will be lower
in absolute dollars, but higher as a percentage of revenues due primarily to a
reduction in revenues.

     RESEARCH AND DEVELOPMENT.  Research and development costs decreased from
$6.9 million, or 16% of revenues in Q2 2002 to $6.2 million, or 18% of revenues
in Q2 2003, and increased from $12.1 million, or 14% in Six Months 2002 to $12.7
million, or 18% in Six Months 2003. The decrease in absolute dollars in Q2 2003
compared to Q2 2002 is primarily attributable to reduced consulting costs
associated with the investments in our product development pipeline in Q2 2002
partially offset by a 29% increase in average research and development staff.
The increase in absolute dollars in Six Months 2002 compared to Six Months 2003
relates primarily to ongoing investments in our product development pipeline. We
expect that research and development costs as a percentage of revenues in fiscal
year 2003 will be higher than 2002.

     SALES AND MARKETING.  Sales and marketing costs decreased from $10.9
million, or 25% of revenues in Q2 2002 to $10.0 million, or 29% of revenues in
Q2 2003, and from $23.9 million, or 27% in Six Months 2002 to $19.3 million, or
28% in Six Months 2003. The decrease in absolute dollars is primarily
attributable to a 19% and 15% decrease in the average number of sales and
marketing staff in Q2 2003 and Six Months 2003, respectively. The decrease is
also attributable to cost cutting measures in discretionary spending such as
marketing and advertising, recruiting and relocation costs. We expect that our
sales and marketing costs as a percentage of revenues in fiscal year 2003 will
be relatively consistent with 2002.

     GENERAL AND ADMINISTRATIVE.  General and administrative costs decreased
from $6.4 million, or 14% of revenues in Q2 2002 to $5.5 million, or 16% of
revenues in Q2 2003, and from $12.6 million, or 14% of revenues in Six Months
2002 to $11.6 million, or 17% in Six Months 2003. The decrease in absolute
dollars is primarily attributable to a 6% and 3% decrease in the average number
of personnel in the areas of human resources, finance and facilities management
in Q2 2003 and Six Months 2003, respectively, as well as the net effect of
reducing the

                                        16
<PAGE>

cost of our satellite offices. We expect that general and administrative costs
as a percentage of revenues in fiscal year 2003 will be relatively consistent
with 2002.

     STOCK COMPENSATION AND WARRANT COSTS.  In April 2000, we recorded $95.5
million of unearned warrant costs related to a warrant granted to Visteon. This
value was calculated using the Black-Scholes pricing model at the date of grant
and is being amortized over a five-year period ending April 2005. In each of Q2
2002 and Q2 2003, $4.8 million was amortized related to this warrant, with $2.8
million reflected as a reduction to our revenues (reducing the revenues under
the Visteon service contract to zero) and $2.0 million as stock compensation and
warrant costs. In each of Six Months 2002 and Six Months 2003, $9.6 million was
amortized related to this warrant, with $5.6 million reflected as a reduction to
our revenues (reducing the revenues under the Visteon service contract to zero)
and $4.0 million as stock compensation and warrant costs.

     INVESTMENT WRITE-DOWN.  In Q1 2002, we recorded a $4.7 million loss on our
investment in Adexa based on Adexa's financial condition. We concluded that
there was an other than temporary decline in the value of our investment in
Adexa. As of June 30, 2003, the remaining book value of our original $6.0
million investment in Adexa was $889,000.

     RESTRUCTURING CHARGES.  In Q1 2003, in response to the continued economic
slowdown, we recorded a restructuring charge covering the severance costs
associated with the elimination of 79 positions in our global workforce. The
estimated liability for severance and termination benefit costs will be paid by
the end of Q3 2003. Additionally, in Q1 2003, we evaluated our office space in
Pittsburgh, Pennsylvania, and ceased using one of the floors we lease in our
global headquarters. The estimated liability for lease costs of $2.8 million
will be paid in monthly installments over the non-cancelable lease term, which
ends in May 2010. In accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," we recorded a restructuring charge
of $4.7 million on Q1 2003, covering these severance and lease costs. We expect
cost savings to be approximately $6.4 million on an annual basis as a result of
this restructuring.

  INTEREST AND OTHER INCOME, NET

     Interest and other income increased from $1.0 in Q2 2002 to $1.1 million in
Q2 2003, and increased from $1.8 million in Six Months 2002 to $2.1 million in
Six Months 2003. The increase is primarily attributable to cash collections of
$350,000 and $550,000 in Q2 2003 and Six Months 2003, respectively, from the
settlement of patent infringement lawsuits in Q1 2003 partially offset by
reduced interest income. In Q2 2002, we earned $790,000 at a weighted-average
rate of return of 2.7%, compared to $660,000 at a weighted-average rate of
return of 2.0% in Q2 2003. In Six Months 2002, we earned $1.6 million at a
weighted-average rate of return of 2.8%, compared to $1.5 million at a
weighted-average rate of return of 2.2% in Six Months 2003.

  PROVISION FOR INCOME TAXES

     Provision for income taxes was $193,000 in Q2 2002 and $216,000 in Q2 2003,
and $346,000 in Six Months 2002 and $507,000 in Six Months 2003, all of which is
comprised of foreign income taxes.

  CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR GOODWILL

     In Q1 2002, in connection with the implementation of SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", we tested goodwill for impairment, and based on estimated future cash
flows, recorded an impairment charge of $5.3 million. For further discussion,
see Note 6 to the Condensed Consolidated Financial Statements.

                                        17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

<Table>
<Caption>
                                               JUNE 30,   DECEMBER 31,
                                                 2003         2002       CHANGE
                                               --------   ------------   -------
                                                       ($ IN THOUSANDS)
<S>                                            <C>        <C>            <C>
Cash and cash equivalents....................  $ 93,256     $ 94,593     $(1,337)
Marketable investments.......................    36,279       40,430      (4,151)
                                               --------     --------     -------
  Total cash and investments.................  $129,535     $135,023     $(5,488)
                                               ========     ========     =======
  Percentage of total assets.................        72%          70%       2pt.
Working capital..............................  $120,968     $119,218     $ 1,750
Days sales outstanding (DSO).................        56           51
</Table>

<Table>
<Caption>
                                                  SIX MONTHS ENDED
                                                      JUNE 30,
                                                 ------------------
                                                  2003       2002      CHANGE
                                                 -------   --------   --------
                                                       ($ IN THOUSANDS)
<S>                                              <C>       <C>        <C>
Cash flows from operating activities...........  $(7,357)  $  7,655   $(15,012)
Cash flows from investing activities...........    2,340    (20,699)    23,039
Cash flows from financing activities...........    3,680     12,037     (8,357)
</Table>

     Net cash provided by operating activities totaled $7.7 million in Six
Months 2002, compared to net cash used in operating activities of $7.4 million
in Six Months 2003. Cash provided by operating activities in Six Months 2002 is
primarily due to improvements in DSO and cash collections on record revenues in
Q4 2001, partially offset by the payment of our annual incentive-based
compensation of $9.4 million. Cash used in operations in Six Months 2003 is
primarily due to operating losses incurred in Six Months 2003 primarily due to
the 22% decrease in revenues from Six Months 2002 to Six Months 2003 and the
payment of our annual incentive-based compensation of $6.6 million. Net cash
from operating activities in Six Months 2002 and Six Months 2003 does not
reflect $7.5 million and $6.6 million, respectively, received under our service
contract with Visteon.

     Net cash used in investing activities totaled $20.7 million in Six Months
2002, compared to net cash provided by investing activities of $2.3 million in
Six Months 2003. In Six Months 2002 and Six Months 2003, we incurred $2.4
million and $1.6 million, respectively, of capital expenditures primarily
related to our continued expansion of information technology hardware, and to a
lesser extent certain office space improvements. We expect our capital
expenditures in fiscal 2003 will be consistent with 2002. Our investing
activities also reflect the investment of funds in the normal course of our
treasury management activities, which includes the movement of funds in and out
of cash and cash equivalents and marketable investments to fund operations and
maximize our rate of return. The net cash outflow of these funds in Six Months
2002 was $18.3 million, compared to net cash inflow into marketable investments
of $4.0 million in Six Months 2003.

     Net cash provided by financing activities totaled $12.0 million in Six
Months 2002 and $3.7 million in Six Months 2003. The positive financing cash
flows in Six Months 2002 reflect proceeds of $5.3 million from the issuance of
common stock through the employee stock purchase plan and option exercises and
$7.5 million received in Six Months 2002 under our service contract with
Visteon. We have determined, based on a review by the SEC in 2001, that we are
required to classify these receipts as payment for the warrant that we granted
in April 2000. The positive financing cash flows in Six Months 2003 reflect
proceeds of $1.7 million from the issuance of common stock through the employee
stock purchase plan and option exercises and $6.6 million received under our
service agreement with Visteon, partially offset by $3.6 million used to
repurchase common stock.

     In October 2001, we amended our bank credit facility to consist of a
revolving credit facility with a maximum principal amount of $20.0 million and a
$4.0 million term loan to be paid in 36 monthly installments, $3.7 million of
which was used to retire borrowings under the previous revolving credit
facility. Borrowings under the revolving credit facility and the term loan bear
interest at the lender's prime rate and prime rate +0.50%, respectively. In
February 2003, we again amended the revolving credit facility to reduce the
availability from $20.0 million to $15.0 million and extend the maturity date
through February 2004. As of June 30, 2003,

                                        18
<PAGE>

$1.3 million was outstanding under the term loan and the interest rate was 4.0%.
At June 30, 2003, $13.8 million was available under the revolving credit
facility based on eligible accounts receivable.

     Our current bank credit facility contains restrictive covenants, including
a limitation on incurring additional indebtedness and paying dividends. Our bank
credit facility also includes financial covenants as to maximum capital
expenditures, minimum tangible net worth, minimum earnings and minimum quick
ratio. We have pledged substantially all of our tangible assets as collateral
for the current credit facility. As of June 30, 2003, we are in compliance with
all covenants.

     In January 2003, the Board of Directors authorized the purchase of up to
15% of our outstanding common stock from time to time on the open market or in
one or more negotiated transactions. As of June 30, 2003, we had purchased
853,500 shares at a weighted average cost of $4.23 per share, all of which have
been retired.

     We will continue to invest in the growth of our business. We expect that
our cash, cash equivalents and marketable investments will increase in the
second half of 2003. However, we may decide to use these resources to fund the
purchase of common shares or acquisitions of complementary businesses and
technologies and, if we do so, our cash, cash equivalents and investments may
decrease. Our allocation between cash and cash equivalents and marketable
investments reflects our anticipated cash flow requirements in the future and
current market interest rates. As of June 30, 2003, our marketable investment
allocation represents 28% of total cash and investments, compared to 30% at
December 31, 2002. We believe that our current resources will be sufficient to
meet our working capital and capital expenditures for at least the next 18 to 24
months. If we are unable to continue to control costs or if we decide to use
cash resources to fund the purchase of common shares or acquisitions of
complimentary businesses or technologies, our resources may be depleted more
quickly than we currently anticipate. In the event that additional financing is
required, we may not be able to raise it on terms acceptable to us, if at all.

     There have been no material changes in our contractual obligations and
commercial commitments during the quarter ended June 30, 2003 from those
presented in our Annual Report on Form 10-K, as filed with the SEC on March 14,
2003.

RECENTLY ADOPTED ACCOUNTING STANDARDS

     As discussed in Note 8 to the Condensed Consolidated Financial Statements,
we implemented new accounting standards related to accounting for, and
disclosure of, guarantees and the accounting for arrangements under which we
will perform multiple revenue-generating activities beginning January 1, 2003.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There have been no material changes in our market risk exposure during the
quarter ended June 30, 2003 that would require an update to the disclosure in
our Annual Report on Form 10-K, as filed with the SEC on March 14, 2003.

ITEM 4.  CONTROLS AND PROCEDURES

     As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as of the end of the period covered by this report have been designed
and are functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. A controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls systems are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.

                                        19
<PAGE>

     No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected or is reasonable likely to materially affect, the Company's internal
control over financial reporting.

                                        20
<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     See Note 9 to the Condensed Consolidated Financial Statements

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company held its Annual Meeting of Stockholders on May 21, 2003. Two
matters were considered and voted upon at the Annual Meeting: the election of
two persons to serve as Class I Directors for a three-year term and the
ratification of the appointment of PricewaterhouseCoopers LLP as independent
accountants to audit the financial statements of the Company and its
subsidiaries for the fiscal year ending December 31, 2003.

     The nominations of Thomas J. Meredith and Davis A. Noble to serve as
directors and the ratification of the appointment of PricewaterhouseCoopers LLP
were considered and ultimately approved.

<Table>
<Caption>
                                                    VOTES        VOTES       VOTES      BROKER
                    NOMINEE                          FOR        AGAINST    WITHHELD    NON-VOTES
                    -------                       ----------   ---------   ---------   ---------
<S>                                               <C>          <C>         <C>         <C>
Thomas J. Meredith..............................  31,267,469      --       5,250,874      --
David A. Noble..................................  31,688,994      --       4,829,349      --
</Table>

<Table>
<Caption>
                                                                 VOTES       VOTES      BROKER
                                                  VOTES FOR     AGAINST    ABSTAINED   NON-VOTES
                                                  ----------   ---------   ---------   ---------
<S>                                               <C>          <C>         <C>         <C>
Ratification of the appointment of
  PricewaterhouseCoopers LLP....................  31,462,517   4,985,329      72,947      --
</Table>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 99.1     Certification of Chief Executive Officer pursuant to Section
          302 of the Sarbanes-Oxley Act of 2002.
 99.2     Certification of Chief Executive Officer pursuant to Section
          302 of the Sarbanes-Oxley Act of 2002.
 99.3     Certification by the Chief Executive Officer and Chief
          Financial Officer Relating to a Periodic Report Containing
          Financial Statements
</Table>

     (b) Reports on Form 8-K.

     Form 8-K furnished on April 28, 2003 under Item 9, "Regulation FD
Disclosure" but intended to be furnished under Item 12, "Results of Operations
and Financial Condition" (with respect to a press release relating to the
Company's performance in the first quarter of 2003).

                                  * * * * * *

                                        21
<PAGE>

                                   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 August 4, 2003.

                                         FREEMARKETS, INC.

                                         By: /s/ JOAN S. HOOPER
                                            ------------------------------------
                                            JOAN S. HOOPER
                                            Executive Vice President, Chief
                                             Financial Officer, Secretary and
                                             Treasurer
                                            (Principal Financial and Accounting
                                             Officer)

                                        22
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<C>      <S>
 31.1    Certification of Chief Executive Officer pursuant to Section
         302 of the Sarbanes-Oxley Act of 2002.
 31.2    Certification of Chief Financial Officer pursuant to Section
         302 of the Sarbanes-Oxley Act of 2002
  32     Certification by the Chief Executive Officer and Chief
         Financial Office Relating to a Periodic Report Containing
         Financial Statements
</Table>

                                        23