##### Table of Contents









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 March 31, 2004

OR



|    |                                                             
|--- | ------------------------------------------------------------
|[ ] | Transition Report Pursuant to Section 13 or 15(d) of
    the

Securities Exchange Act of 1934


For the transition period
from                     to

Commission File Number 000-27913

FreeMarkets, Inc.

(Exact Name of Registrant as Specified in its
Charter)


| |                                                                 |  |  |  |                                      | 
| | --------------------------------------------------------------- |  |  |  | ------------------------------------ | 
|
|
|
|
| | Delaware                                                        |  |  |  | 04-3265483                           | 
| | (State or Other Jurisdiction of Incorporation or  Organization) |  |  |  | (I.R.S. Employer Identification No.) | 
|
|
|
|
|
| | FreeMarkets Center                                              |  |  |  |                                      | 
| | 210 Sixth Avenue                                                |  |  |  |                                      | 
| | Pittsburgh, PA                                                  |  |  |  | 15222                                | 
| | (Address of Principal Executive Offices)                        |  |  |  | (Zip Code)                           | 

Registrants telephone number, including area code:
(412) 434-0500

http://www.freemarkets.com


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
[ü]  No [ ]

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2).  Yes
[ü]  No [ ]

The number of shares of the registrants common stock
outstanding as of the close of business on March 31, 2004
was 42,975,011.



---






---










FreeMarkets, Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2004


Index

|                                                                                                      |                                                                                                                        |      |    |   | 
|----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ---- | -- | - | 
|                                                                                                      |                                                                                                                        | Page
|                                                                                                      |                                                                                                                        |     
|PART I  FINANCIAL
    INFORMATION                                                                    |                                                                                                                        |      |    |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Item 1. Financial
    Statements:                                                                     |                                                                                                                        |      |    |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Condensed Consolidated
    Balance Sheets as of March 31, 2004 (unaudited) and
    December 31, 2003                   |      |    | 3 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Condensed Consolidated
    Statements of Operations for the three months ended
    March 31, 2004 and 2003 (unaudited) |      |    | 4 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      | Condensed Consolidated
    Statements of Cash Flows for the three months ended
    March 31, 2004 and 2003 (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                                |                                                                                                                        |      | 22 |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Item 4. Controls
    and Procedures                                                                   |                                                                                                                        |      | 22 |  
|                                                                                                     
|PART II  OTHER
    INFORMATION                                                                       |                                                                                                                        |      |    |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Item 1.
    Legal Proceedings                                                                         |                                                                                                                        |      | 23 |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Item 6. Exhibits and
    Reports on Form 8-K                                                          |                                                                                                                        |      | 23 |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|SIGNATURE                                                                                             |                                                                                                                        |      | 24 |  
|Exhibit 10.3(F)                                                                                      
|Exhibit 31.1                                                                                         
|Exhibit 31.2                                                                                         
|Exhibit 32                                                                                           



2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements

FreeMarkets, Inc. and Subsidiaries



Condensed Consolidated Balance Sheets


($ in thousands)


|                                                          |                                        |                                                |        |              |         |  |        |          |         | 
|--------------------------------------------------------- | -------------------------------------- | ---------------------------------------------- | ------ | ------------ | ------- |  | ------ | -------- | ------- | 
|                                                          |                                        | March 31,                                      |        | December 31,
|                                                          |                                        | 2004                                           |        | 2003*       
|                                                          |                                        |                                                |        |             
|                                                          |                                        | (unaudited)                                    |        |             
|                                                         
|                                                         
|                                                         
|                                                         
|Assets                                                    |                                        |                                                |        |              |         |  |        |         
|                                                         
|                                                         
|                                                         
|                                                         
|Current assets:                                           |                                        |                                                |        |              |         |  |        |         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Cash and cash equivalents              |                                                | $      | 60,850       |         |  | $      | 102,935  |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term marketable investments      |                                                |        | 11,265       |         |  |        | 8,663    |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accounts receivable, net               |                                                |        | 27,743       |         |  |        | 25,039   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other current assets                   |                                                |        | 6,847        |         |  |        | 6,399    |        
|                                                          |                                        |                                                |        |              |         |  |        |         
|                                                          |                                        | Total current assets                           |        |              | 106,705 |  |        |          | 143,036 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Long-term marketable investments                          |                                        |                                                | 35,635 |              |         |  | 25,076 |         
|                                                         
|                                                         
|                                                         
|                                                         
|Property and equipment, net                               |                                        |                                                | 9,324  |              |         |  | 10,571 |         
|                                                         
|                                                         
|                                                         
|                                                         
|Goodwill and other intangible assets, net                 |                                        |                                                | 18,838 |              |         |  | 2,579  |         
|                                                         
|                                                         
|                                                         
|                                                         
|Other assets                                              |                                        |                                                | 2,020  |              |         |  | 1,887  |         
|                                                          |                                        |                                                |        |              |         |  |        |         
|                                                          |                                        | Total assets                                   |        | $            | 172,522 |  |        | $        | 183,149 | 
|                                                          |                                        |                                                |        |              |         |  |        |         
|                                                         
|Liabilities and Stockholders
    Equity                  |                                        |                                                |        |              |         |  |        |         
|                                                         
|                                                         
|                                                         
|                                                         
|Current liabilities:                                      |                                        |                                                |        |              |         |  |        |         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accounts payable                       |                                                | $      | 2,901        |         |  | $      | 4,757    |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accrued incentive compensation         |                                                |        | 1,811        |         |  |        | 6,915    |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accrued restructuring charges          |                                                |        | 2,681        |         |  |        | 2,676    |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other current liabilities              |                                                |        | 20,444       |         |  |        | 19,020   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Current portion of long-term debt      |                                                |        | 486          |         |  |        | 818      |        
|                                                          |                                        |                                                |        |              |         |  |        |         
|                                                          |                                        | Total current liabilities                      |        |              | 28,323  |  |        |          | 34,186  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Accrued restructuring charges, net of
    current portion |                                        |                                                | 5,638  |              |         |  | 4,404  |         
|                                                         
|                                                         
|                                                         
|                                                         
|Long-term debt                                            |                                        |                                                | 309    |              |         |  | 342    |         
|                                                          |                                        |                                                |        |              |         |  |        |         
|                                                          |                                        | Total liabilities                              |        |              | 34,270  |  |        |          | 38,932  | 
|                                                          |                                        |                                                |        |              |         |  |        |         
|Commitments and contingencies                             |                                        |                                                |        |              |         |  |        |         
|                                                         
|                                                         
|                                                         
|                                                         
|Stockholders equity:                                     |                                        |                                                |        |              |         |  |        |         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Common stock                           |                                                |        | 430          |         |  |        | 423      |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Additional capital                     |                                                |        | 599,239      |         |  |        | 592,343  |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Unearned stock-based compensation      |                                                |        | (12          | )       |  |        | (24      | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Stock purchase warrants                |                                                |        | 76,388       |         |  |        | 76,388   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accumulated other comprehensive income |                                                |        | 438          |         |  |        | 220      |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accumulated deficit                    |                                                |        | (538,231     | )       |  |        | (525,133 | )      
|                                                          |                                        |                                                |        |              |         |  |        |         
|                                                          |                                        | Total stockholders equity                     |        |              | 138,252 |  |        |          | 144,217 | 
|                                                          |                                        |                                                |        |              |         |  |        |         
|                                                          |                                        | Total liabilities and
    stockholders equity |        | $            | 172,522 |  |        | $        | 183,149 | 
|                                                          |                                        |                                                |        |              |         |  |        |         



---



|  |                                                         
|- | --------------------------------------------------------
|* | Summarized from audited December 31, 2003 balance sheet.

The accompanying notes are an integral part of the condensed
consolidated financial statements.

3



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries



Condensed Consolidated Statements of Operations


(unaudited; amounts in thousands, except per share
amounts)


|                                                                  |                                          |                    |        |        |         |   |        |        |         |  
|----------------------------------------------------------------- | ---------------------------------------- | ------------------ | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                                                                  |                                          |                   
|                                                                  |                                          | Three Months Ended
|                                                                  |                                          | March 31,         
|                                                                  |                                          |                   
|                                                                  |                                          | 2004               |        | 2003  
|                                                                  |                                          |                    |        |       
|Net revenues                                                      |                                          | $                  | 29,997 |        |         | $ | 34,520 |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Operating costs and expenses:                                     |                                          |                    |        |        |         |   |        |       
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Cost of revenues                         |                    |        | 16,878 |         |   |        | 18,399 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Research and development                 |                    |        | 5,812  |         |   |        | 6,490  |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Sales and marketing                      |                    |        | 8,313  |         |   |        | 9,369  |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | General and administrative               |                    |        | 4,019  |         |   |        | 6,051  |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Stock compensation and warrant costs (1) |                    |        | 2,210  |         |   |        | 1,989  |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Ariba merger-related costs               |                    |        | 2,108  |         |   |        |       |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Restructuring charges                    |                    |        | 4,131  |         |   |        | 4,719  |        
|                                                                  |                                          |                    |        |        |         |   |        |       
|Total operating costs and expenses                                |                                          |                    | 43,471 |        |         |   | 47,017 |       
|                                                                  |                                          |                    |        |        |         |   |        |       
|                                                                  |                                          | Operating loss     |        |        | (13,474 | ) |        |        | (12,497 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Interest and other income, net                                    |                                          |                    | 691    |        |         |   | 989    |       
|                                                                  |                                          |                    |        |        |         |   |        |       
|                                                                  |                                          | Loss before taxes  |        |        | (12,783 | ) |        |        | (11,508 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Provision for income taxes                                        |                                          |                    | 315    |        |         |   | 291    |       
|                                                                  |                                          |                    |        |        |         |   |        |       
|                                                                  |                                          | Net loss           |        | $      | (13,098 | ) |        | $      | (11,799 | )
|                                                                  |                                          |                    |        |        |         |   |        |       
|Basic and diluted earnings per share                              |                                          | $                  | (0.31  | )      |         | $ | (0.28  | )     
|                                                                  |                                          |                    |        |        |         |   |        |       
|Shares used in computing basic and diluted
    earnings per share |                                          |                    | 42,575 |        |         |   | 41,998 |       
|                                                                  |                                          |                    |        |        |         |   |        |       



---



|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(1) | Stock compensation and warrant costs are attributable to the
    following operating expense categories:

|                         |  |                    |       |      |  |   |       | 
|------------------------ |  | ------------------ | ----- | ---- |  | - | ----- | 
|                         |  |                   
|                         |  | Three Months Ended
|                         |  | March 31,         
|                         |  |                   
|                         |  | 2004               |       | 2003
|                         |  |                    |       |     
|Research and development |  | $                  | 8     |      |  | $ | 5     | 
|                        
|                        
|                        
|                        
|Sales and marketing      |  |                    | 2,202 |      |  |   | 1,984 | 
|                         |  |                    |       |      |  |   |       | 
|                         |  | $                  | 2,210 |      |  | $ | 1,989 | 
|                         |  |                    |       |      |  |   |       | 

The accompanying notes are an integral part of the condensed
consolidated financial statements.

4



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries



Condensed Consolidated Statements of Cash Flows


(unaudited; $ in thousands)


|                                                     |                                                                              |                                             |                                    |         |        |         |         |         |        |        |  
|---------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------ | -
|                                                     |                                                                              |                                            
|                                                     |                                                                              | Three Months Ended                         
|                                                     |                                                                              | March 31,                                  
|                                                     |                                                                              |                                            
|                                                     |                                                                              | 2004                                        |                                    | 2003   
|                                                     |                                                                              |                                             |                                    |        
|Cash flows from operating activities:                |                                                                              |                                             |                                    |         |        |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                     |                                             | $                                  | (13,098 | )      |         | $       | (11,799 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash
    from operating activities: |                                             |                                    |         |        |         |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Depreciation and amortization               |                                    |         | 2,858  |         |         |         | 3,767  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Provision for bad debts                     |                                    |         | 249    |         |         |         | 750    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Stock compensation and warrant costs        |                                    |         | 2,210  |         |         |         | 1,989  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Non-cash restructuring (benefit)/costs, net |                                    |         | (286   | )       |         |         | 89     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash from changes in assets and liabilities, net
    of acquisition:         |                                             |                                    |         |        |         |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accounts receivable                         |                                    |         | (1,314 | )       |         |         | 6      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Other assets                                |                                    |         | (581   | )       |         |         | 1,505  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accounts payable                            |                                    |         | (1,856 | )       |         |         | (433   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Other liabilities                           |                                    |         | (3,884 | )       |         |         | (2,438 | )     
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|                                                     |                                                                              |                                             | Net cash from operating activities |         |        | (15,702 | )       |         |        | (6,564 | )
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|Cash flows from investing activities:                |                                                                              |                                             |                                    |         |        |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition, net of cash acquired of $2,150                                  |                                             |                                    | (14,847 | )      |         |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of marketable investments                                          |                                             |                                    | (18,815 | )      |         |         | (6,659  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Maturities of marketable investments                                         |                                             |                                    | 5,782   |        |         |         | 24,279  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                                         |                                             |                                    | (1,204  | )      |         |         | (219    | )     
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|                                                     |                                                                              |                                             | Net cash from investing activities |         |        | (29,084 | )       |         |        | 17,401 |  
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|Cash flows from financing activities:                |                                                                              |                                             |                                    |         |        |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of debt                                                            |                                             |                                    | (365    | )      |         |         | (874    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from debt                                                           |                                             |                                    |        |        |         |         | 500     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from customer fees applied
    to warrant                           |                                             |                                    | 938     |        |         |         | 3,750   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments to acquire and retire stock                                         |                                             |                                    |        |        |         |         | (3,581  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Options exercised                                                            |                                             |                                    | 2,128   |        |         |         | 170     |       
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|                                                     |                                                                              |                                             | Net cash from financing activities |         |        | 2,701   |         |         |        | (35    | )
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|Net change in cash and cash equivalents              |                                                                              |                                             | (42,085                            | )       |        |         | 10,802  |        
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning
    of period |                                                                              |                                             | 102,935                            |         |        |         | 94,593  |        
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|Cash and cash equivalents at end of period           |                                                                              | $                                           | 60,850                             |         |        | $       | 105,395 |        
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        
|Supplemental non-cash disclosure:                    |                                                                              |                                             |                                    |         |        |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Amounts due from customer characterized as
    payment for warrant           |                                             | $                                  | 4,654   |        |         | $       | 1,875   |       
|                                                     |                                                                              |                                             |                                    |         |        |         |         |        

The accompanying notes are an integral part of the condensed
consolidated financial statements.

5



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements


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, 2004. 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, 2003, included in the Companys Annual
Report on Form 10-K/ A filed with the SEC on April 29,
2004.

Note 2.     Merger with Ariba

In January 2004, the Company announced a definitive agreement to
merge with Ariba, Inc. (Ariba), a provider of
Enterprise Spend Management products and services. Under terms
of the agreement, shareholders of the Companys common
stock will receive 2.25 Ariba common shares and $2.00 in cash
for each outstanding share of FreeMarkets. The transaction is
subject to customary closing conditions, including regulatory
review and approval by the stockholders of each company, and is
expected to close in the latter part of the second quarter.
Because the merger is subject to factors beyond the
parties control, however, the Company cannot predict
whether or when the merger will be completed. The Company has
incurred to date merger-related costs of approximately
$2.1 million related to financial advisor and other
professional fees, which were all expensed in Q1 2004. Upon
closing of the merger we become obligated to pay $2.5 million in
merger-related investment banking fees.

Note 3.     Earnings Per Share

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

|                                |  |                    |       |      |  |  |       | 
|------------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | 
|                                |  |                   
|                                |  | Three Months Ended
|                                |  | March 31,         
|                                |  |                   
|                                |  | 2004               |       | 2003
|                                |  |                    |       |     
|                                |  |                   
|                                |  | (in thousands)    
|                               
|                               
|                               
|                               
|Stock options (treasury method) |  |                    | 3,236 |      |  |  | 2,070 | 

Options and warrants to purchase 9.6 million and
14.3 million shares of common stock were outstanding as of
March 31, 2004 and 2003, respectively, but were not
included in the computation of diluted EPS because the exercise
price was greater than the average market price of the common
shares.

6



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries


Notes to Condensed Consolidated Financial
Statements  (continued)

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:

|                                                                                                            |                   |                       |         |      |       |   |         |   |       |  
|----------------------------------------------------------------------------------------------------------- | ----------------- | --------------------- | ------- | ---- | ----- | - | ------- | - | ----- | -
|                                                                                                            |                   |                      
|                                                                                                            |                   | Three Months Ended   
|                                                                                                            |                   | March 31,            
|                                                                                                            |                   |                      
|                                                                                                            |                   | 2004                  |         | 2003
|                                                                                                            |                   |                       |         |     
|                                                                                                            |                   |                      
|                                                                                                            |                   | (in thousands, except
|                                                                                                            |                   | per share amounts)   
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net loss, as reported                                                                                       |                   | $                     | (13,098 | )    |       | $ | (11,799 | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Add: Stock-based employee compensation expense
    included in reported net income                          |                   |                       | 12      |      |       |   | 28      |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Less: Total stock-based employee compensation
    expense determined under fair value method for all awards |                   |                       | (5,182  | )    |       |   | (9,366  | )
|                                                                                                            |                   |                       |         |      |       |   |         |  
|Pro forma net loss                                                                                          |                   | $                     | (18,268 | )    |       | $ | (21,137 | )
|                                                                                                            |                   |                       |         |      |       |   |         |  
|Earnings per share:                                                                                         |                   |                       |         |      |       |   |         |  
|                                                                                                            | Basic and diluted |                       |         |      |       |   |         |   |      
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            |                   | As reported           |         | $    | (0.31 | ) |         | $ | (0.28 | )
|                                                                                                            |                   |                       |         |      |       |   |         |  
|                                                                                                            |                   | Pro forma             |         | $    | (0.43 | ) |         | $ | (0.50 | )
|                                                                                                            |                   |                       |         |      |       |   |         |  

Note 4.     Stockholders
Equity

The components of comprehensive loss were as follows:

|                                                   |  |                    |         |      |  |   |         |  
|-------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                                   |  |                   
|                                                   |  | Three Months Ended
|                                                   |  | March 31,         
|                                                   |  |                   
|                                                   |  | 2004               |         | 2003
|                                                   |  |                    |         |     
|                                                   |  |                   
|                                                   |  | (in thousands)    
|                                                  
|                                                  
|                                                  
|                                                  
|Net loss                                           |  | $                  | (13,098 | )    |  | $ | (11,799 | )
|                                                  
|                                                  
|                                                  
|                                                  
|Change in unrealized value on
    investments, net |  |                    | 128     |      |  |   | (140    | )
|                                                  
|                                                  
|                                                  
|                                                  
|Translation adjustment, net                        |  |                    | 90      |      |  |   | 61      |  
|                                                   |  |                    |         |      |  |   |         |  
|                                                   |  | $                  | (12,880 | )    |  | $ | (12,000 | )
|                                                   |  |                    |         |      |  |   |         |  

The components of accumulated comprehensive income were as
follows:

|                                              |  |                |     |              |  |   |     |  
|--------------------------------------------- |  | -------------- | --- | ------------ |  | - | --- | -
|                                              |  | March 31,      |     | December 31,
|                                              |  | 2004           |     | 2003        
|                                              |  |                |     |             
|                                              |  |               
|                                              |  | (in thousands)
|                                             
|                                             
|                                             
|                                             
|Unrealized gains (losses) on investments, net |  | $              | 47  |              |  | $ | (81 | )
|                                             
|                                             
|                                             
|                                             
|Cumulative translation adjustments            |  |                | 391 |              |  |   | 301 |  
|                                              |  |                |     |              |  |   |     |  
|                                              |  | $              | 438 |              |  | $ | 220 |  
|                                              |  |                |     |              |  |   |     |  

Note 5.     Acquisition, Goodwill
and Other Intangible Assets

In January 2004, the Company acquired the auction and
services business of Covisint, an independent e-business
provider for the global automotive industry for
$16.3 million. The acquisition of Covisint is complimentary
to the Companys existing service offering. In accordance
with SFAS No. 141, Business Combinations, the
acquisition was accounted for as a purchase business
combination. Accordingly, the purchase price allocations have
been based upon an estimated fair value of net assets acquired.
Covisints operating results

7



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries


Notes to Condensed Consolidated Financial
Statements  (continued)

have been included in the Companys Consolidated Results of
Operations since the date of the acquisition. The purchase price
of $17.0 million, including transaction costs of $697,000,
was allocated as follows (in thousands):

|                                  |  |   |        |  
|--------------------------------- |  | - | ------ | -
|                                 
|                                 
|                                 
|                                 
|Fair value of assets acquired     |  | $ | 19,147 |  
|                                 
|                                 
|                                 
|                                 
|Fair value of liabilities assumed |  |   | (2,150 | )
|                                  |  |   |        |  
|Total purchase price              |  |   | 16,997 |  
|                                 
|                                 
|                                 
|                                 
|Less: cash acquired               |  |   | (2,150 | )
|                                  |  |   |        |  
|Cash paid for acquisition         |  | $ | 14,847 |  
|                                  |  |   |        |  

The Companys methodology for allocating the purchase price
to the customer contracts and technology acquired is based on a
valuation performed by an independent third party. Goodwill will
not be amortized, but will instead be subject to an annual
impairment test. Goodwill resulting from the acquisition is
expected to be tax deductible, but will be subject to a full
valuation allowance as a result of the Companys history of
losses. Amortization of the technology acquired is being
amortized over its estimated useful life of six months in cost
of revenues in the Statement of Operations. Amortization of the
customer contracts acquired is being amortized over the
estimated useful lives of three to four years and is recorded as
a reduction to gross revenues in the Statement of Operations.

The following unaudited pro forma financial information presents
the Companys results of operations as if the acquisition
of Covisint occurred at the beginning of the period presented.
The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have
occurred had the Company and Covisint constituted a single
entity during such period.

|                                     |  |                    |         |                    |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | ------------------ |  | - | ------- | -
|                                     |  | Three Months Ended |         | Three Months Ended
|                                     |  | March 31, 2004     |         | March 31, 2003    
|                                     |  |                    |         |                   
|Revenues                             |  | $                  | 29,997  |                    |  | $ | 41,008  |  
|                                    
|                                    
|                                    
|                                    
|Net loss                             |  |                    | (13,098 | )                  |  |   | (13,605 | )
|                                    
|                                    
|                                    
|                                    
|Basic and diluted earnings per share |  |                    | (0.31   | )                  |  |   | (0.32   | )

The following table sets forth an analysis of goodwill and other
intangible assets as of March 31, 2004:

|                            |  |                  |  |                   |       |             |  |              |        |                |  |   |      |   |  |   |        | 
|--------------------------- |  | ---------------- |  | ----------------- | ----- | ----------- |  | ------------ | ------ | -------------- |  | - | ---- | - |  | - | ------ | 
|                            |  |                  |  | Carrying          |       |             |  |              |        | Carrying      
|                            |  | Estimated Useful |  | Amount            |       |             |  |              |        | Amount        
|                            |  | Life             |  | December 31, 2003 |       | Acquisition |  | Amortization |        | March 31, 2004
|                            |  |                  |  |                   |       |             |  |              |        |               
|                            |  |                 
|                            |  | (in thousands)  
|                           
|                           
|                           
|                           
|Goodwill                    |  | Indefinite       |  | $                 | 2,000 |             |  | $            | 7,597  |                |  | $ |     |   |  | $ | 9,597  | 
|                           
|                           
|                           
|                           
|Customer contracts acquired |  | 3  4 years      |  |                   |      |             |  |              | 9,100  |                |  |   | (577 | ) |  |   | 8,523  | 
|                           
|                           
|                           
|                           
|Technology acquired         |  | 6 months         |  |                   |      |             |  |              | 300    |                |  |   | (150 | ) |  |   | 150    | 
|                           
|                           
|                           
|                           
|Patents and trademarks      |  | 17 years         |  |                   | 579   |             |  |              |       |                |  |   | (11  | ) |  |   | 568    | 
|                            |  |                  |  |                   |       |             |  |              |        |                |  |   |      |   |  |   |        | 
|                            |  |                  |  | $                 | 2,579 |             |  | $            | 16,997 |                |  | $ | (738 | ) |  | $ | 18,838 | 
|                            |  |                  |  |                   |       |             |  |              |        |                |  |   |      |   |  |   |        | 

The Company completed its annual test for impairment in Q1 2004,
and concluded at that time that the Company did not have any
impairment of goodwill based on the estimated fair value as
determined by discounted cash flows.

8



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries


Notes to Condensed Consolidated Financial
Statements  (continued)

Note 6.     Restructuring Charge

2004 Restructuring Plan

In Q1 2004, the Company initiated two restructuring programs.
These programs were focused on eliminating certain positions
throughout its global workforce and re-assessing the
Companys facility needs. The following is a summary of
these programs:



| |                         
| | ------------------------
| | Workforce Reduction Plan

In Q1 2004, the Company executed a restructuring plan resulting
in the elimination of 69 positions in its global workforce. This
represented approximately 7% of total employees. The Company
recorded a restructuring charge of $2.0 million in Q1 2004
covering these severance costs. The remaining liability for
employee severance and termination benefit costs of $131,000
will be paid in Q2 2004.



| |                        
| | -----------------------
| | Facility Reduction Plan

Also in Q1 2004, the Company re-assessed its global headquarters
office space in Pittsburgh, Pennsylvania, and ceased using one
of the floors it leases through May 2010, as well as closed
two domestic offices. The Company recorded a restructuring
charge of $2.8 million in Q1 2004. The Company intends to
sub-lease the floor in its global headquarters, and estimated
sublease income based on current real estate market conditions.

The 2004 facility reduction plan includes $2.4 million of
estimated future obligations for non-cancelable lease payments
generated by exiting an excess leased floor and two domestic
offices, $331,000 for the impairment of property and equipment
(primarily leasehold improvements) that were no longer in use
and $81,000 for restructuring plan implementation costs. The
accrual for lease costs (net of anticipated sub-lease proceeds)
will be paid over the lease term though May 2010. As of
March 31, 2004, $543,000 of the $2.3 million accrual
will be paid in the twelve months from March 31, 2004 and
is therefore classified as a current liability in the
Companys consolidated balance sheet.

The Company is continuing to evaluate its office space
requirements at its headquarters, and as a result, the Company
may incur additional lease-related charges in the future.

2003 Restructuring Plans

Throughout 2003, the Company initiated three restructuring
programs. These programs were focused on eliminating certain
positions throughout its global workforce, re-assessing the
Companys facility needs and consolidating European
operations to create a more profitable and efficient business.
The following is a summary of these programs:



| |                         
| | ------------------------
| | Workforce Reduction Plan

In Q1 2003, the Company executed a restructuring plan resulting
in the elimination of 79 positions in its global workforce. This
represented approximately 7% of total employees. The Company
recorded a restructuring charge of $1.8 million in Q1 2003
covering these severance costs. The liability for employee
severance and termination benefit costs related to this activity
was paid by December 31, 2003.



| |                        
| | -----------------------
| | Facility Reduction Plan

Also in 2003, the Company re-assessed its global headquarters
office space in Pittsburgh, Pennsylvania, and ceased using two
of the floors it leases through May 2010. The Company
recorded a restructuring charge of $3.0 million and
$2.0 million in Q1 2003 and Q4 2003, respectively. The
Company intends to sub-lease these floors, and estimated
sublease income based on prevailing real estate market
conditions.

9



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries


Notes to Condensed Consolidated Financial
Statements  (continued)

The facility reduction plan includes $2.9 million and
$1.8 million of estimated future obligations for
non-cancelable lease payments generated by exiting excess leased
floors in Q1 2003 and Q4 2003, respectively, and $89,000 and
$282,000 for the impairment of property and equipment (leasehold
improvements) that were no longer in use in Q1 2003 and Q4 2003,
respectively. The accrual for lease costs (net of anticipated
sub-lease proceeds) will be paid over the lease term though
May 2010. As of March 31, 2004, $688,000 of the
$4.2 million accrual will be paid in the twelve month
period from March 31, 2004, and is therefore classified as
a current liability in the Companys consolidated balance
sheet.



| |                            
| | ---------------------------
| | European Restructuring Plan

In Q3 2003, in order to better serve the Companys
customers and enable it to create a more leveraged, profitable
and efficient business across Europe, the Company initiated a
restructuring plan resulting in the net elimination of 74
positions in its European business. There were 105 positions
eliminated with the closing of the Brussels facility, offset by
31 positions added to the existing European facilities in
London, Paris and Frankfurt. The Company recorded a
restructuring charge of $3.2 million in Q3 2003 covering
these severance costs and legal fees. As of March 31, 2004,
the severance costs have been paid in accordance with local
employment laws.

In Q4 2003, the Company recorded an additional charge of
$4.2 million. This charge includes $847,000 of severance
costs, $1.8 million of estimated future obligations for
non-cancelable lease payments generated by exiting the Brussels
facility, $1.2 million for the impairment of property and
equipment (primarily leasehold improvements) that were no longer
in use, and $308,000 for restructuring plan implementation
costs, primarily comprised of legal and other professional fees.
The Company intends to sub-lease the facility, and estimated
sublease income based on prevailing real estate market
conditions. The Company expects to pay the remaining
restructuring accrual relating to severance and implementation
costs in the amount of $617,000 in Q2 2004. The accrual for
lease costs (net of anticipated sub-lease proceeds) will be paid
over the lease term through August 2006. As of
March 31, 2004, $702,000 of the $1.1 million accrual
for lease costs will be paid in the next twelve months, and is
therefore classified as a current liability in the
Companys consolidated balance sheet.

In Q1 2004, as a result of substantially completing the
liquidation of the investment in the Belgium entity, the Company
recorded a benefit of $617,000 relating to the amount
accumulated in the translation component of equity.

The following table sets forth an analysis of the restructuring
accrual activity for the period ended March 31, 2004:

|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |       |  
|-------------------------------- | --------------------------------- | ----------------------- | ------ | ----------------------- |  | --------- | ----- | ------------- |  | ----- | ----- | - |  | - | ------ | ---- | - | - | ------ | ----- | -
|                                 |                                   |                         |        |                         |  |          
|                                 |                                   | 2004 Restructuring Plan |        | 2003 Restructuring Plan |  |          
|                                 |                                   |                         |        |                         |  |          
|                                 |                                   | Workforce               |        | Facility                |  | Facility  |       | European      |  |      
|                                 |                                   | Reduction               |        | Reduction               |  | Reduction |       | Restructuring |  |      
|                                 |                                   | Plan                    |        | Plan                    |  | Plan      |       | Plan          |  | Total
|                                 |                                   |                         |        |                         |  |           |       |               |  |      
|Balance as of December 31, 2003  |                                   | $                       |       |                         |  | $         |      |               |  | $     | 4,318 |   |  | $ | 2,762  |      |   | $ | 7,080  |      
|                                
|                                
|                                
|                                
|Restructuring charge in Q1 2004: |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      
|                                
|                                
|                                
|                                
|                                 | Severance and benefits            |                         |        | 1,966                   |  |           |       |              |  |       |       |  |  |   |        |     |   |   |        | 1,966 |  
|                                
|                                
|                                
|                                
|                                 | Accrued lease costs               |                         |        |                        |  |           |       | 2,370         |  |       |       |  |  |   |        |     |   |   |        | 2,370 |  
|                                
|                                
|                                
|                                
|                                 | Property and equipment impairment |                         |        |                        |  |           |       | 331           |  |       |       |  |  |   |        |     |   |   |        | 331   |  
|                                
|                                
|                                
|                                
|                                 | Implementation costs              |                         |        |                        |  |           |       | 81            |  |       |       |  |  |   |        |     |   |   |        | 81    |  
|                                
|                                
|                                
|                                
|                                 | Liquidation of subsidiary         |                         |        |                        |  |           |       |              |  |       |       |  |  |   |        | (617 | ) |   |        | (617  | )
|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      
|                                 | Total charge in Q1 2004           |                         |        | 1,966                   |  |           |       | 2,782         |  |       |       |  |  |   |        | (617 | ) |   |        | 4,131 |  
|                                
|                                
|                                
|                                
|Cash paid                        |                                   |                         | (1,835 | )                       |  |           | (165  | )             |  |       | (163  | ) |  |   | (1,015 | )    |   |   | (3,178 | )    
|                                
|                                
|                                
|                                
|Amounts utilized                 |                                   |                         |       |                         |  |           | (331  | )             |  |       |      |   |  |   | 617    |      |   |   | 286    |      
|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      
|Balance as of March 31, 2004     |                                   | $                       | 131    |                         |  | $         | 2,286 |               |  | $     | 4,155 |   |  | $ | 1,747  |      |   | $ | 8,319  |      
|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      

10



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##### Table of Contents



FreeMarkets, Inc. and Subsidiaries


Notes to Condensed Consolidated Financial
Statements  (continued)

Note 7.     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. On March 10, 2004, the court certified the case
as a class action. The case is now in the discovery 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. 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. 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



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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/ A for
the year ended December 31, 2003, as filed with the SEC on
April 29, 2004.

Overview

FreeMarkets provides software and service solutions to help
companies improve their sourcing and global supply management
processes and enhance the capabilities of their supply
management organizations. Our customers are buyers of industrial
parts, raw materials, commodities and services. As of
March 31, 2004, we serve our customers from 17 locations in
13 countries on five continents. Our team members provide
service to customers in more than 35 languages through
operations centers in Pittsburgh and Singapore.

Since 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 our 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 2002 and 2003, we introduced a number of new solution
offerings to expand beyond sourcing to address a broader set of
supply management activities. Our development of a broader set
of solutions 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.

In January 2004, we announced a definitive agreement to
merge with Ariba, Inc. (Ariba), a provider of
Enterprise Spend Management products and services. Under terms
of the agreement, shareholders of our common stock will receive
2.25 Ariba common shares and $2.00 in cash for each outstanding
share of FreeMarkets. The transaction is subject to customary
closing conditions, including regulatory review and approval by
the stockholders of each company, and is expected to close in
the latter part of the second quarter. Because the merger is
subject to factors beyond the parties control, however, we
cannot predict whether or when the merger will be completed.

Also in January 2004, we acquired the auction and services
business of Covisint, an independent e-business service provider
for the global automotive industry, for $16.3 million.

Also in January 2004, we executed a restructuring plan
resulting in the elimination of 69 positions in our global
workforce. Additionally, in February 2004, we evaluated our
office space in Pittsburgh, Pennsylvania, and

12



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Overview of Q1 2004 Financial Results

Our operating results during Q1 2004 should be considered within
the context of our continuing transition to a provider of
multiple software and service solutions, the restructuring plan
implemented during the quarter and our merger announcement with
Ariba in January 2004. Net revenues in Q1 2004 decreased
$4.5 million, or 13% from Q1 2003 due to a combination of
factors, including a change in the mix of products and services
deployed by our customers, partially offset by revenue from
contracts acquired from Covisint, which comprise approximately
10% of Q1 2004 net revenues. The decrease is also due to the
merger announcement, which has caused a number of existing
customers to either defer their contract renewal decisions or
make smaller renewal commitments. We believe that the
announcement has lengthened our sales cycles with potential
customers, who are deferring their purchasing decisions because
of concerns regarding our future solutions roadmap.

Total operating expenses in Q1 2004 declined $3.5 million,
or 7% from Q1 2003 primarily due to reduced compensation costs
(down $2.2 million on a 10% decrease in average number of
employees), depreciation expense (down $1.7 million) and cost
cutting measures in discretionary spending such as marketing and
advertising (down $1.4 million). The decline in operating
expenses was offset by $2.1 million in Ariba merger-related
costs. We ended Q1 2004 with 896 employees versus 992 at the end
of Q1 2003. Finally, total cash and investments of
$107.8 million at the end of Q1 2004 was $28.9 million
less than the $136.7 million at the end of Q4 2003. The decrease
is primarily due to the $14.8 million cash paid for the
acquisition of Covisints auction services business and
related transaction costs in January 2004 and the
$13.1 million net loss in Q1 2004.

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.

For all offerings, the Company recognizes revenue when all of
the following criteria are met as set forth in Staff Accounting
Bulletin No. 101:



| |     |                                                                                           
| | --- | ------------------------------------------------------------------------------------------
| | (1) | Persuasive evidence of an arrangement exists (contract is signed
    and legally binding),
|
| | (2) | Services have been rendered or access has been provided (with no
    future obligations), 

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| |     |                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------
| | (3) | The fee is fixed and determinable (amount is known and not
    contingent upon future events), and
|
| | (4) | Collectibility is probable (high degree of confidence that the
    customer will pay).            

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. The customers related to the acquisition of Covisint
are served using legacy technology that will be transitioned
over to FreeMarkets technology during 2004. The services
provided are similar in nature to that of our FullSource
offering, and therefore, substantially all of their revenues are
allocated to FullSource and recognized in a manner consistent
with our FullSource service contracts.

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 hosted technology 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 ES, Spend Visibility and Supplier
Implementation solutions 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.

The majority of our customer agreements include multiple service
offerings. Each service offering consists of a single element.
In determining the appropriate amount of revenue to be
recognized for each offering, we evaluate whether these
arrangements contain separate units of accounting. This
determination is based on whether: the delivered item has value
to the customer on a standalone basis (that is, if it is sold
separately by any vendor or the customer could resell the
deliverable); there is objective and reliable evidence of fair
value of the undelivered items in the arrangement; and if the
arrangement includes a general right of return relative to the
delivered item, delivery or performance of the undelivered
item(s) is considered probable and substantially in the control
of the vendor. In instances where all of these conditions are
satisfied, we recognize revenue for the offerings that have been
delivered to the customer based on the relative fair value of
the delivered item when compared to the total arrangement
considered, subject to certain limitations. The fair value for
each element is established based on the sales price charged
when the same element is sold separately.

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.



| |                                
| | -------------------------------
| | 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 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 economic conditions worsen,
additional allowances may be required in the future.

14



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##### Table of Contents





| |                   
| | ------------------
| | Stock compensation

SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition
and Disclosure, 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.



| |                        
| | -----------------------
| | Lease abandonment costs

Lease abandonment costs for abandoned facilities are estimated
to include the impairment of leasehold improvement and remaining
lease liabilities, offset by estimated sublease income, if
appropriate. Estimates related to sublease costs and income are
based on assumptions regarding the period required to locate and
contract with suitable sub-lessees. Each quarter, we review
these estimates, and to the extent that our assumptions change,
the ultimate restructuring expenses for these abandoned
facilities could vary from current estimates. In 2003, we
recorded a $6.5 million charge for the closing of our
Brussels facility and abandonment of two leased floors in our
global headquarters office space in Pittsburgh. In Q1 2004, we
recorded a $2.4 million charge for the abandonment of one
additional leased floor in our Pittsburgh facility, as well as
closed two domestic offices.

Treatment of Visteon Fees

In April 2000, we entered into a five-year agreement with
Visteon under which we agreed to provide our FullSource
technology-enhanced services, and Visteon agreed to pay us fixed
monthly fees plus the possibility of additional variable fees
based on performance. We have also received marketing and public
relations benefits as a result of our relationship with Visteon.
At the time we executed this service agreement, we granted to
Visteon a warrant for 1.75 million shares of our common stock,
with an exercise price of $.01 per share. The warrant was valued
at $95.5 million using the Black-Scholes pricing model at
the date of the grant in April 2000. We exclude from our
revenues the fees we earn under our service agreement with
Visteon; however, our cost of revenues includes the costs that
we incur in serving Visteon under this agreement.

The service agreement with Visteon expires in April 2005,
and because we have classified the fees we earn under this
agreement as payment for the warrant, we do not expect to
recognize revenues under this agreement during the remainder of
its term.

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

|                      |                                                    |                    |        |        |   |   |        |        |  
|--------------------- | -------------------------------------------------- | ------------------ | ------ | ------ | - | - | ------ | ------ | -
|                      |                                                    |                   
|                      |                                                    | Three Months Ended
|                      |                                                    | March 31,         
|                      |                                                    |                   
|                      |                                                    | 2004               |        | 2003  
|                      |                                                    |                    |        |       
|                      |                                                    |                   
|                      |                                                    | (in thousands)    
|                     
|                     
|                     
|                     
|Net revenues and fees |                                                    | $                  | 32,573 |        |   | $ | 37,333 |       
|                     
|                     
|                     
|                     
|                      | Less fees characterized as payment
    for warrant |                    |        | (2,576 | ) |   |        | (2,813 | )
|                      |                                                    |                    |        |        |   |   |        |       
|Net revenues          |                                                    | $                  | 29,997 |        |   | $ | 34,520 |       
|                      |                                                    |                    |        |        |   |   |        |       

Treatment of Covisint Acquisition

In January 2004, we acquired the auction and services
business of Covisint, an independent e-business service provider
for the global automotive industry, for $16.3 million. As a
result of this transaction, the selling shareholders of Covisint
became FreeMarkets customers through our assumption of those
shareholders existing service agreements with Covisint. We
are recording the amortization of the fair value of those
customer contracts as a reduction in revenue. We recorded a
$9.1 million customer intangible asset as a result of a
third-party valuation of those contracts, which is being
amortized over three to four years. During Q1 2004, we recorded
$577,000 of amortization as a reduction in revenue.

15



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##### Table of Contents



Results of Operations

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

|                               |                                            |                    |     |      |    |  |     |     |   
|------------------------------ | ------------------------------------------ | ------------------ | --- | ---- | -- |  | --- | --- | --
|                               |                                            |                   
|                               |                                            | Three Months Ended
|                               |                                            | March 31,         
|                               |                                            |                   
|                               |                                            | 2004               |     | 2003
|                               |                                            |                    |     |     
|Net revenues                   |                                            |                    | 100 | %    |    |  | 100 | %  
|                              
|                              
|                              
|                              
|Operating costs and expenses:  |                                            |                    |     |      |    |  |     |    
|                              
|                              
|                              
|                              
|                               | Cost of revenues                           |                    |     | 56   |    |  |     | 53  |   
|                              
|                              
|                              
|                              
|                               | Research and development                   |                    |     | 19   |    |  |     | 19  |   
|                              
|                              
|                              
|                              
|                               | Sales and marketing                        |                    |     | 28   |    |  |     | 27  |   
|                              
|                              
|                              
|                              
|                               | General and administrative                 |                    |     | 13   |    |  |     | 18  |   
|                              
|                              
|                              
|                              
|                               | Stock compensation and warrant costs*      |                    |     | 8    |    |  |     | 6   |   
|                              
|                              
|                              
|                              
|                               | Ariba merger-related costs                 |                    |     | 7    |    |  |     |    |   
|                              
|                              
|                              
|                              
|                               | Restructuring charge                       |                    |     | 14   |    |  |     | 13  |   
|                               |                                            |                    |     |      |    |  |     |    
|                               | Operating loss                             |                    |     | (45  | )  |  |     | (36 | ) 
|                              
|                              
|                              
|                              
|Interest and other income, net |                                            |                    | 2   |      |    |  | 3   |    
|                               |                                            |                    |     |      |    |  |     |    
|                               | Loss before taxes and change in accounting |                    |     | (43  | )  |  |     | (33 | ) 
|                              
|                              
|                              
|                              
|Provision for income taxes     |                                            |                    | 1   |      |    |  | 1   |    
|                               |                                            |                    |     |      |    |  |     |    
|                               | Net loss                                   |                    |     | (44  | )% |  |     | (34 | )%
|                               |                                            |                    |     |      |    |  |     |    



---



|  |                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------
|* | Stock compensation and warrant costs have not been allocated to
    research and development and sales and marketing.

Three Months Ended March 31, 2004 and 2003

All references to Q1 2004 and Q1 2003
are for the three months ended March 31, 2004 and 2003,
respectively.

Net revenues

Net revenues decreased 13% from $34.5 million in Q1 2003 to
$30.0 million in Q1 2004. The decrease in net revenues is
due to a combination of factors, including a change in the mix
of products and services deployed by our customers, partially
offset by revenue from contracts acquired from Covisint, which
comprise approximately 10% of Q1 2004 net revenues. The decrease
is also due to the merger announcement, which has caused a
number of existing customers to either defer their contract
renewal decisions or make smaller renewal commitments. We
believe that the announcement has lengthened our sales cycles
with potential customers, who are deferring their purchasing
decisions because of concerns regarding our future solutions
roadmap.

In 2003 and early 2004, several large customers renewed their
FullSource service agreements at lower market volumes than the
volumes provided in previously existing agreements, resulting in
34% lower net revenues from our FullSource offering in Q1 2004
compared to Q1 2003. In addition, with the introduction of our
less-costly QS solution in early 2001 and several other new
offerings in late 2002 and early 2003, many FullSource-only
customers have expanded their use of our solutions to include a
broader mix of FullSource, QS and related offerings. 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 solutions to existing customers have resulted in
lower total net revenues due to this migration to our
self-service technologies. For instance, our transition to a
multiple-solutions company over the past two years is a result
of leveraging our knowledge and service capabilities to grow our
other solutions, most notably QS, ES and Consulting. These other
solutions combined delivered 46% more net revenues in Q1 2004
compared to Q1 2003, partially offsetting the decline in
FullSource.

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##### Table of Contents



To illustrate this migration, our top 20 customers in Q1 2003,
which accounted for approximately 60% of total revenues, reduced
their use of FullSource by $10.4 million in Q1 2004 as
compared with Q1 2003. Those same 20 customers migrated a
portion of their sourcing solutions needs to our QS and other
less costly offerings over the same time period, resulting in an
increase from those customers for these solutions of
$1.9 million, or 66%. However, the growth in those
less-costly solutions and the acquisition of Covisint in Q1 2004
did not offset the decline in revenues from our FullSource
solution.

Operating costs and expenses

Cost of revenues. Cost of revenues decreased from
$18.4 million, or 53% of revenues in Q1 2003 to
$16.9 million, or 56% of revenues in Q1 2003. The increase
in cost of revenues as a percentage of revenues from Q1 2003 to
Q1 2004 was primarily the result of the 13% decrease in revenues
from Q1 2003 to Q1 2004, partially offset by an 8% overall
decrease in cost of revenues. The decrease in absolute dollar
amounts from Q1 2003 to Q1 2004 is primarily attributable to the
following: (1) decrease in compensation and benefits
expense in the amount of $1.2 million, primarily due to a
9% decrease in the average number of account management, global
sourcing services and market operations staff; (2) reduced
overhead in the amount of $1.1 million, primarily comprised
of reduced depreciation expense in the amount of $936,000; and
(3) reduced bad debt expense in the amount of $501,000 due to
the write-off of approximately $900,000 due from a single
customer in Q1 2003. The decrease in cost of revenues in
absolute dollars is partially offset by an increase in
professional and consulting costs in the amount of
$1.4 million associated with serving contracts acquired in
the Covisint acquisition in January 2004. 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.

Research and development. Research and development
costs decreased from $6.5 million, or 19% of revenues in Q1
2003, to $5.8 million, or 19% of revenues in Q1 2004. The
decrease was primarily related to the following: (1) reduced
overhead in the amount of $718,000, primarily comprised of
reduced depreciation expense; and (2) reduced consulting
fees in the amount of $329,000. The decrease in research and
development costs is partially offset by a $400,000 charge in Q1
2004 associated with a legal settlement with a former vendor.

Sales and marketing. Sales and marketing costs
decreased from $9.4 million, or 27% of revenues in Q1 2003, to
$8.3 million, or 28% of revenues in Q1 2004. The decrease
is primarily attributable to cost cutting measures in
discretionary spending in Q1 2004 such as marketing and
advertising in the amount of $1.4 million.

General and administrative. General and
administrative costs decreased from $6.1 million, or 18% of
revenues in Q1 2003, to $4.0 million, or 13% of revenues in
Q1 2004. The decrease from Q1 2003 to Q1 2004 is primarily
attributable to the following: (1) reduced compensation and
benefits expense in the amount of $855,000 due to a 28% decrease
in the average number of personnel in the areas of human
resources, finance and facilities management in Q1 2004 compared
to Q1 2003; and (2) reduced overhead in the amount of
$761,000, primarily comprised of reduced depreciation expense in
the amount of $245,000.

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 Q1 2003 and Q1 2004,
$4.8 million was amortized related to this warrant, with
$2.8 million and $2.6 million in Q1 2003 and Q1 2004,
respectively, reflected as a reduction to our revenues (reducing
the revenues under the Visteon service contract to zero) and
$2.0 million and $2.2 million in Q1 2003 and Q1 2004,
respectively, as stock compensation and warrant costs.

Ariba merger-related costs. In January 2004,
we announced a definitive agreement to merge with Ariba, Inc.
(Ariba), a provider of Enterprise Spend Management
products and services. In Q1 2004, we incurred merger-related
costs of $2.1 million related to our financial advisor and
other professional fees.

Restructuring charges. Throughout 2003 and Q1
2004, we initiated several restructuring programs that were
focused on eliminating certain positions throughout our global
workforce, re-assessing our facility needs and consolidating
European operations to create a more profitable and efficient
business. We expect to generate annual savings of approximately
$19.5 million as a result of these programs, of which
$17.3 million relates to compensation and benefits and
$2.2 million relates to rent and depreciation. Annual
savings are expected to be

17



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##### Table of Contents





2003 Restructuring plans



| |                         
| | ------------------------
| | Workforce reduction plan

In Q1 2003, we executed a restructuring plan resulting in the
elimination of 79 positions in its global workforce. This
represented approximately 7% of total employees. We recorded a
restructuring charge of $1.8 million in Q1 2003 covering
these severance costs. The liability for employee severance and
termination benefit costs related to this activity was paid by
December 31, 2003; and therefore no incremental liquidity
resources will be utilized in the future to implement this plan.
Annual savings from this plan are approximately
$6.4 million, of which approximately $1.6 million was
realized in compensation and benefit costs of our Q1 2004
operating results. Annual savings for this plan are expected to
be realized in the following income statement line items:
$3.7 million in cost of revenues; $1.0 million in
research and development; $1.0 million in sales and
marketing; and $642,000 in general and administrative.



| |                        
| | -----------------------
| | Facility reduction plan

Also in 2003, we re-assessed our global headquarters office
space in Pittsburgh, Pennsylvania, and ceased using two of the
floors we lease through May 2010. We recorded a
restructuring charge of $3.0 million and $2.0 million
in Q1 2003 and Q4 2003, respectively. We intend to sub-lease
these floors, and estimated sublease income based on current
real estate market conditions.

The facility reduction plan includes $2.9 million and
$1.8 million of estimated future obligations for
non-cancelable lease payments generated by exiting excess leased
floors in Q1 2003 and Q4 2003, respectively, and $89,000 and
$282,000 for the impairment of property and equipment (leasehold
improvements) that were no longer in use in Q1 2003 and Q4 2003,
respectively. The accrual for lease costs (net of anticipated
sub-lease proceeds) will be paid over the lease term though
May 2010. As of March 31, 2004, $688,000 of the
$4.2 million accrual will be paid in the twelve month
period from March 31, 2004, and is therefore classified as
a current liability in the Companys consolidated balance
sheet. The $688,000 current liability also represents our
expected liquidity requirements in the next twelve months to
continue the implementation of this plan. Annual savings from
this plan are $717,000 of which $179,000 was realized in rent
and depreciation costs of our Q1 2004 operating results. Annual
savings for this plan are expected to be realized in the
following income statement line items: $447,000 in cost of
revenues; $123,000 in research and development; $123,000 in
sales and marketing; and $24,000 in general and administrative.



| |                            
| | ---------------------------
| | European restructuring plan

In Q3 2003, in order to better serve our customers and enable us
to create a more leveraged, profitable and efficient business
across Europe, we initiated a restructuring plan resulting in
the net elimination of 74 positions in our European business.
There were 105 positions eliminated with the closing of our
Brussels facility, offset by 31 positions added to our existing
European facilities in London, Paris and Frankfurt. We recorded
a restructuring charge of $3.2 million in Q3 2003 covering
these severance costs and legal fees. As of March 31, 2004,
the severance costs have been paid in accordance with local
employment laws; and therefore no incremental liquidity
resources will be utilized in the future to implement this
portion of the Europe plan.

In Q4 2003, we recorded an additional charge of
$4.2 million. This charge includes $847,000 of severance
costs, $1.8 million of estimated future obligations for
non-cancelable lease payments generated by exiting the Brussels
facility, $1.2 million for the impairment of property and
equipment (primarily leasehold improvements) that were no longer
in use, and $308,000 for restructuring plan implementation
costs, primarily comprised of legal and other professional fees.
We intend to sub-lease the facility, and estimated sublease
income based on current real estate market conditions. We expect
to pay the remaining restructuring accrual relating to severance
and implementation in the amount of $617,000 in Q2 2004. The
accrual for lease costs (net of anticipated sub-lease proceeds)
will be paid over the lease term through August 2006. As of
March 31, 2004, $702,000 of the

18



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##### Table of Contents





In Q1 2004, as a result of substantially completing the
liquidation of the investment in the Belgium entity, we recorded
a benefit of $617,000 relating to the amount accumulated in the
translation component of equity.

2004 Restructuring plans



| |                         
| | ------------------------
| | Workforce reduction plan

In Q1 2004, we executed a restructuring plan resulting in the
elimination of 69 positions in our global workforce. This
represented approximately 7% of total employees. We recorded a
restructuring charge of $2.0 million in Q1 2004 covering
these severance costs. The remaining liability for employee
severance and termination benefit costs of $131,000 will be paid
in Q2 2004, which represents our expected liquidity requirements
to conclude this plan. Annual savings from this plan are
approximately $6.1 million, of which approximately $950,000
was realized in compensation and benefit costs of our Q1 2004
operating results. Annual savings from this plan are expected to
be realized in the following income statement line items:
$2.0 million in cost of revenues; $2.1 million in
research and development; $1.0 million in sales and
marketing; and $853,000 in general and administrative.



| |                        
| | -----------------------
| | Facility reduction plan

Also in Q1 2004, we re-assessed our global headquarters office
space in Pittsburgh, Pennsylvania, and ceased using one of the
floors we lease through May 2010, as well as closed two
domestic offices. We recorded a restructuring charge of
$2.8 million in Q1 2004. We intend to sub-lease the floor
in our global headquarters, and estimated sublease income based
on current real estate market conditions.

The 2004 facility reduction plan includes $2.4 million of
estimated future obligations for non-cancelable lease payments
generated by exiting an excess leased floor and two domestic
offices, $331,000 for the impairment of property and equipment
(primarily leasehold improvements) that were no longer in use
and $81,000 for restructuring plan implementation costs. The
accrual for lease costs (net of anticipated sub-lease proceeds)
will be paid over the lease term though May 2010. As of
March 31, 2004, $543,000 of the $2.3 million accrual
will be paid in the twelve month period from March 31, 2004
and is therefore classified as a current liability in our
consolidated balance sheet. The $543,000 current liability also
represents our expected liquidity requirements in the next
twelve months to continue the implementation of this plan.
Annual savings from this plan are $464,000, of which $44,000 was
realized in rent and depreciation costs of our Q1 2004 operating
results. Annual savings from this plan are expected to be
realized in the following income statement line items: $269,000
in cost of revenues; $74,000 in research and development;
$74,000 in sales and marketing; and $47,000 in general and
administrative.

We are continuing to evaluate our office space requirements at
our headquarters, and as a result, we may incur additional
lease-related charges in the future.

19



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##### Table of Contents



The following table sets forth an analysis of the restructuring
accrual activity for the period ended March 31, 2004:

|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |       |  
|-------------------------------- | --------------------------------- | ----------------------- | ------ | ----------------------- |  | --------- | ----- | ------------- |  | ----- | ----- | - |  | - | ------ | ---- | - | - | ------ | ----- | -
|                                 |                                   |                         |        |                         |  |          
|                                 |                                   | 2004 Restructuring Plan |        | 2003 Restructuring Plan |  |          
|                                 |                                   |                         |        |                         |  |          
|                                 |                                   | Workforce               |        | Facility                |  | Facility  |       | European      |  |      
|                                 |                                   | Reduction               |        | Reduction               |  | Reduction |       | Restructuring |  |      
|                                 |                                   | Plan                    |        | Plan                    |  | Plan      |       | Plan          |  | Total
|                                 |                                   |                         |        |                         |  |           |       |               |  |      
|Balance as of December 31, 2003  |                                   | $                       |       |                         |  | $         |      |               |  | $     | 4,318 |   |  | $ | 2,762  |      |   | $ | 7,080  |      
|                                
|                                
|                                
|                                
|Restructuring charge in Q1 2004: |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      
|                                
|                                
|                                
|                                
|                                 | Severance and benefits            |                         |        | 1,966                   |  |           |       |              |  |       |       |  |  |   |        |     |   |   |        | 1,966 |  
|                                
|                                
|                                
|                                
|                                 | Accrued lease costs               |                         |        |                        |  |           |       | 2,370         |  |       |       |  |  |   |        |     |   |   |        | 2,370 |  
|                                
|                                
|                                
|                                
|                                 | Property and equipment impairment |                         |        |                        |  |           |       | 331           |  |       |       |  |  |   |        |     |   |   |        | 331   |  
|                                
|                                
|                                
|                                
|                                 | Implementation costs              |                         |        |                        |  |           |       | 81            |  |       |       |  |  |   |        |     |   |   |        | 81    |  
|                                
|                                
|                                
|                                
|                                 | Liquidation of subsidiary         |                         |        |                        |  |           |       |              |  |       |       |  |  |   |        | (617 | ) |   |        | (617  | )
|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      
|                                 | Total charge in Q1 2004           |                         |        | 1,966                   |  |           |       | 2,782         |  |       |       |  |  |   |        | (617 | ) |   |        | 4,131 |  
|                                
|                                
|                                
|                                
|Cash paid                        |                                   |                         | (1,835 | )                       |  |           | (165  | )             |  |       | (163  | ) |  |   | (1,015 | )    |   |   | (3,178 | )    
|                                
|                                
|                                
|                                
|Amounts utilized                 |                                   |                         |       |                         |  |           | (331  | )             |  |       |      |   |  |   | 617    |      |   |   | 286    |      
|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      
|Balance as of March 31, 2004     |                                   | $                       | 131    |                         |  | $         | 2,286 |               |  | $     | 4,155 |   |  | $ | 1,747  |      |   | $ | 8,319  |      
|                                 |                                   |                         |        |                         |  |           |       |               |  |       |       |   |  |   |        |      |   |   |        |      

Interest and other income, net. Interest and other
income, net decreased from $989,000 in Q1 2003 to $691,000 in Q1
2004. The decrease was primarily attributable to a decrease in
average cash and marketable investments in Q1 2004 compared to
Q1 2003 and a reduced weighted-average rate of return on cash
and marketable investments. In Q1 2003, we earned $814,000 at a
weighted-average rate of return of 2.5%, compared to $427,000 at
a rate of return of 1.4% in Q1 2004.

Provision for income taxes. Provision for income
taxes was $291,000 in Q1 2003 and $315,000 in Q1 2004, and is
comprised of foreign income taxes.

Liquidity and Capital Resources

|                             |                            |                  |        |              |   |        |         |         |   |   |         |         |  
|---------------------------- | -------------------------- | ---------------- | ------ | ------------ | - | ------ | ------- | ------- | - | - | ------- | ------- | -
|                             |                            | March 31,        |        | December 31, |   |       
|                             |                            | 2004             |        | 2003         |   | Change
|                             |                            |                  |        |              |   |       
|                             |                            |                 
|                             |                            | ($ in thousands)
|                            
|                            
|                            
|                            
|Cash and cash equivalents    |                            | $                | 60,850 |              |   | $      | 102,935 |         |   | $ | (42,085 | )      
|                            
|                            
|                            
|                            
|Marketable investments       |                            |                  | 46,900 |              |   |        | 33,739  |         |   |   | 13,161  |        
|                             |                            |                  |        |              |   |        |         |         |   |   |         |        
|                             | Total cash and investments |                  | $      | 107,750      |   |        | $       | 136,674 |   |   | $       | (28,924 | )
|                             |                            |                  |        |              |   |        |         |         |   |   |         |        
|                             | Percentage of total assets |                  |        | 62           | % |        |         | 75      | % |   |         | 13 pts  |  
|                            
|                            
|                            
|                            
|Working capital              |                            | $                | 78,382 |              |   | $      | 108,850 |         |   | $ | 30,468  |        
|                            
|                            
|                            
|                            
|Days sales outstanding (DSO) |                            |                  | 70     |              |   |        | 63      |         |   |   |         |        

|                                     |  |                    |         |      |  |        |        |   |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | ---- |  | ------ | ------ | - |  | - | ------- | -
|                                     |  |                    |         |     
|                                     |  | Three Months Ended |         |     
|                                     |  | March 31,          |         |     
|                                     |  |                    |         |     
|                                     |  | 2004               |         | 2003 |  | Change
|                                     |  |                    |         |      |  |       
|                                     |  |                   
|                                     |  | ($ in thousands)  
|                                    
|                                    
|                                    
|                                    
|Cash flows from operating activities |  | $                  | (15,702 | )    |  | $      | (6,564 | ) |  | $ | (9,138  | )
|                                    
|                                    
|                                    
|                                    
|Cash flows from investing activities |  |                    | (29,084 | )    |  |        | 17,401 |   |  |   | (46,485 | )
|                                    
|                                    
|                                    
|                                    
|Cash flows from financing activities |  |                    | 2,701   |      |  |        | (35    | ) |  |   | 2,736   |  

Net cash used in operating activities totaled $6.6 million
in Q1 2003 and $15.7 million in Q1 2004. Cash used in
operations in both periods is primarily due to operating losses
incurred as a result of the 20% and 13% decrease in revenues
from Q1 2002 to Q1 2003 and Q1 2003 to Q1 2004, respectively,
and the payment of our annual incentive-based compensation of
$7.5 million and $6.9 million, respectively. The use of
cash in Q1 2004 is also attributable to the payment of
merger-related costs of $2.1 million and an increase in
DSOs from 59 days

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Net cash provided by investing activities totaled
$17.4 million in Q1 2003, compared to net cash used in
investing activities of $29.1 million in Q1 2004. The use
of cash in investing activities in Q1 2004 is primarily
attributable to $14.8 million of cash used to acquire
Covisint, an independent e-business provider for the global
automotive industry. See Note 5 to the consolidated financial
statements. 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 maximize
our rate of return. The net cash inflow in Q1 2003 was
$17.6 million, compared to net cash outflow of
$13.0 million in Q1 2004.

Net cash used in financing activities totaled $35,000 in Q1
2003, compared to net cash provided by financing activities of
$2.7 million in Q1 2004. The net cash used in financing
activities in Q1 2003 primarily reflect $3.6 million to
purchase common stock and $874,000 in debt repayments, partially
offset by $3.8 million received under our service agreement
with Visteon. The net cash provided by financing activities in
Q1 2004 primarily reflects $2.1 million in proceeds from
option exercises and $938,000 received under our service
agreement with Visteon.

In February 2003, we entered into the sixth amendment to
our revolving credit facility and term loan, which reduced the
availability under the revolving credit facility from
$20.0 million to $15.0 million and extended the
maturity date through February 2004. Borrowings under the
revolving credit facility and term loan bear interest at the
lenders prime rate and prime rate +0.50%, respectively. In
December 2003, we entered into the seventh amendment, which
modified the financial covenant on minimum earnings to exclude
non-recurring restructuring charges relating to our Facilities
Reduction Plan and the European Restructuring Plan for the
quarter ended December 31, 2003. In February 2004, we
entered into the eighth amendment, which extends the maturity
date through the earlier of August 31, 2004 or one business
day before the effective date of the anticipated merger with
Ariba. In April 2004, we entered into the ninth amendment,
which modified the financial covenant on tangible net worth to
reflect the impact of the Covisint acquisition. As of
March 31, 2004, $389,000 was outstanding under the term
loan and the interest rate was 4.5%. At March 31, 2004,
$14.8 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. We are currently in
compliance with all covenants.

In conjunction with the anticipated merger with Ariba, we have
incurred $2.1 million in pretax merger-related costs
through March 31, 2004. Upon closing of the merger we
become obligated to pay $2.5 million in merger-related
investment banking fees.

We will continue to invest in the growth of our business. In Q2
2004, we anticipate negative net cash flows as a result of
operating losses in Q2 2004, with positive net cash flows in the
second half of 2004. 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. We may
decide to use cash resources to fund acquisitions of
complementary businesses and technologies and, if we do so, we
may experience negative cash flows. 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 March 31, 2004, our marketable
investment allocation represents 44% of total cash and
investments, compared to 25% at December 31, 2003. If we
are unable to continue to control costs, 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.

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 March 31, 2004, we had purchased and
retired 1,298,500 shares at a weighted average share price of
$4.93.

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##### Table of Contents



In September 2003, an arbitrator ruled in our favor in
proceedings against a Brazilian former customer for amounts
earned in 2000, which we wrote-off in 2001. The amount of the
arbitration award was $1.7 million, which includes accrued
interest from the date the invoices were due. We will record
this award as a reduction to bad debt expense in cost of
revenues on the cash basis of accounting due to the uncertainty
of collection.

There have been no material changes in our contractual
obligations and commercial commitments during the quarter ended
March 31, 2004 from those presented in our Annual Report on
Form 10-K/ A, as filed with the SEC on April 29, 2004.




Item 3.     Quantitative and
Qualitative Disclosures About Market Risk

There have been no material changes in our market risk exposure
during the quarter ended March 31, 2004 that would require
an update to the disclosure in our Annual Report on
Form 10-K, as filed with the SEC on March 1, 2004.




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 acting Chief Financial Officer,
of the effectiveness of the Companys disclosure controls
and procedures. Based on that evaluation, the Chief Executive
Officer and acting 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.

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.

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##### Table of Contents






PART II  OTHER INFORMATION




Item 1.     Legal
Proceedings

See Note 7 to the Condensed Consolidated Financial Statements.




Item 6.     Exhibits and
Reports on Form 8-K

(a) Exhibits.

|        |  |                                                                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                      
|2       |  | Agreement and Plan of Merger and Reorganization
    among Registrant, Fleet Merger Corporation and Ariba, Inc. dated
    as of January 23, 2004 (which is incorporated herein by
    reference to Exhibit 2.1 of Form 8-K dated
    January 27, 2004)
|10.3(f) |  | Eighth Amendment to Credit Agreement between the
    registrant and the banks party thereto and PNC Bank, National
    Association as administrative agent, and Silicon Valley Bank, as
    syndication agent, dated as of February 20, 2004         
|31.1    |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                               
|31.2    |  | Certification of acting Chief Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|32      |  | Certification by the Chief Executive Officer and
    acting Chief Financial Officer Relating to a Periodic Report
    Containing Financial Statements                                                                                                

(b) Reports on Form 8-K.

On January 27, 2004, the Company filed a Form 8-K
reporting the Plan of Merger and Reorganization with Ariba, Inc.

On February 2, 2004, the Company filed a Form 8-K,
furnished under item 12, Results of Operations and
Financial Condition (with respect to a press release
relating to the Company performance in 2003).

* * * * * *

23



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##### Table of Contents






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 April 29, 2004.



| |                  
| | -----------------
| | FREEMARKETS, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ SEAN M. ROLLMAN

| |                                                 
| | ------------------------------------------------
| |                                                 
| | SEAN M. ROLLMAN                                 
| | Vice President, Controller, Treasurer and acting
| | Chief Financial Officer                         
| | (Principal Financial and Accounting Officer)    

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##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                      
|2       |  | Agreement and Plan of Merger and Reorganization
    among Registrant, Fleet Merger Corporation and Ariba, Inc. dated
    as of January 23, 2004 (which is incorporated herein by
    reference to Exhibit 2.1 of Form 8-K dated
    January 27, 2004)
|       
|10.3(f) |  | Eighth Amendment to Credit Agreement between the
    registrant and the banks party thereto and PNC Bank, National
    Association as administrative agent, and Silicon Valley Bank, as
    syndication agent, dated as of February 20, 2004.        
|       
|31.1    |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                               
|       
|31.2    |  | Certification of acting Chief Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|       
|32      |  | Certification by the Chief Executive Officer and
    Acting Chief Financial Office Relating to a Periodic Report
    Containing Financial Statements                                                                                                 

25