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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




|(Mark One)                                         
|---------------------------------------------------
|                                                   
|[X]                                                
|                                                   
|For the fiscal year ended December 31, 2003        
|                                                   
|OR                                                 
|                                                   
|[  ]                                               
|                                                   
|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 |  | (I.R.S. Employer Identification No.)
|or Organization)                              |  |                                     

|                                         |  |           
|---------------------------------------- |  | ----------
|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
Registrants URL: http://www.freemarkets.com
Securities registered pursuant to Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|None                |  | Not applicable                           

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

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

|                                                                                                           |  |   |             | 
|---------------------------------------------------------------------------------------------------------- |  | - | ----------- | 
|Aggregate market value of voting common stock held by
non-affiliates of the registrant as of June 30, 2003 |  | $ | 292,115,297 | 
|Number of shares of the registrants common stock
outstanding as of February 1, 2004                       |  |   | 42,583,297  | 

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III (other than Securities Authorized
for Issuance under Equity Compensation Plans) will be incorporated by
reference to specified portions of the Registrants definitive Proxy Statement
for the Registrants 2004 Annual Meeting of Stockholders, if filed with the
Commission not later than 120 days after the Registrants fiscal year ended
December 31, 2003 included in an amendment to this Form 10-K.



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TABLE OF CONTENTS



|                                                |                                                                                                         |  |  |  |  |  |  | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                         
|                                                | Item 1. Business                                                                                       
|                                                | Item 2. Properties                                                                                     
|                                                | Item 3. Legal Proceedings                                                                              
|                                                | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                        
|                                                | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                | Item 6. Selected Financial Data                                                                        
|                                                | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                | Item 8. Financial Statements and Supplementary Data                                                    
|                                                | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                | Item 9A. Controls and Procedures                                                                       
|PART III                                       
|                                                | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                | Item 11. Executive Compensation                                                                        
|                                                | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                | Item 13. Certain Relationships and Related Transactions                                                
|                                                | Item 14. Principal Accountant Fees and Services                                                        
|PART IV                                        
|                                                | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                     
|EXHIBIT INDEX                                  
|SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS  
|Sixth Amendment to Credit Agreement            
|Seventh Amendment to Credit Agreement          
|Report of Independent Auditors                 
|Section 302 Certification of CEO               
|Section 302 Certification of Acting CFO        
|Section 906 Certification of CEO and Acting CFO



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FreeMarkets, Inc.
Form 10-K
Index

|                                                                                    |  |                                                                                                |  |     
|----------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|                                                                                    |  |                                                                                                |  | Page
|                                                                                    |  |                                                                                                |  |     
|PART I                                                                              |  |                                                                                               
|Item 1.                                                                             |  | Business                                                                                       |  | 1   
|Item 2.                                                                             |  | Properties                                                                                     |  | 13  
|Item 3.                                                                             |  | Legal Proceedings                                                                              |  | 13  
|Item 4.                                                                             |  | Submission of Matters to a Vote of Security Holders                                            |  | 13  
|PART II                                                                             |  |                                                                                               
|Item 5.                                                                             |  | Market for Registrants Common Equity and Related
Stockholder Matters                          |  | 14  
|Item 6.                                                                             |  | Selected Financial Data                                                                        |  | 15  
|Item 7.                                                                             |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations          |  | 16  
|Item 7A.                                                                            |  | Quantitative and Qualitative Disclosures About Market
Risk                                     |  | 28  
|Item 8.                                                                             |  | Financial Statements and Supplementary Data                                                    |  | 29  
|Item 9.                                                                             |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure           |  | 50  
|Item 9A.                                                                            |  | Controls and Procedures                                                                        |  | 50  
|PART III                                                                            |  |                                                                                               
|Item 10.                                                                            |  | Directors and Executive Officers of the Registrant                                             |  | 50  
|Item 11.                                                                            |  | Executive Compensation                                                                         |  | 50  
|Item 12.                                                                            |  | Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |  | 50  
|Item 13.                                                                            |  | Certain Relationships and Related Transactions                                                 |  | 52  
|Item 14.                                                                            |  | Principal Accountant Fees and Services                                                         |  | 52  
|PART IV                                                                             |  |                                                                                               
|Item 15.                                                                            |  | Exhibits, Financial Statement Schedules and Reports on Form
8-K                                |  | 53  
|SIGNATURES                                                                          |  | 56                                                                                            
|SECURITIES EXCHANGE ACT RULE 13a-14 and 15d-14 CERTIFICATIONS OF
CEO AND ACTING CFO |  |                                                                                               

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PART I




Item 1. Business

Certain statements contained in this Annual Report on Form 10-K (Form
10-K) 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. Please refer to the risk
factors set forth in the section entitled Additional Factors that May Affect
Future Results for a description of some of the risk factors that could cause
our results to differ materially from our forward-looking statements.

Overview

FreeMarkets provides software, services and solutions to help companies
improve their sourcing and supply management processes and enhance the
capabilities of their supply management organization. Our customers are buyers
of industrial parts, raw materials, commodities and services. As of December
31, 2003, we serve our customers from 17 locations in 13 countries on five
continents. Our team members provide services to customers in more than 35
languages through operations centers in Pittsburgh and Singapore.

Since our inception, FreeMarkets has provided software and services to
help companies identify savings, enhance their sourcing efficiency and achieve
their strategic sourcing goals by enabling them to source goods and services in
our online markets. In providing these services, we work with our customers to
identify and screen suppliers and to assemble a request for quotation that
provides detailed, clear and consistent information for suppliers to use in our
online markets. Our web-based technology enables suppliers from around the
world to submit bids for 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 the second half of
2002 and beginning of 2003, we introduced a number of new product offerings to
expand our solutions beyond sourcing to address a broader set of supply
management activities. Our development of a broader set of solutions in 2002
and 2003 is part of a strategic transition from a company that offers a single
technology-enhanced service to one with multiple software and service
solutions. These activities include supply analysis and strategy, spend
requirements management, sourcing, supplier development and supplier
relationship management. We refer to these activities as Global Supply
Management, or GSM.

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

Recent Events

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 sourcing and services assets of
Covisint, an independent e-business service provider for the global automotive
industry, for $16.3 million in cash.

Also in January 2004, we executed a restructuring plan resulting in the
elimination of 65 positions in our global workforce. Additionally, in February
2004, we evaluated our office space in Pittsburgh, Pennsylvania, and determined
that we will cease using one of the floors we currently lease in our global
headquarters. In accordance with SFAS No. 146, we will record a restructuring
charge of approximately $4.4 million in the first quarter of 2004 covering
these severance and lease costs.

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Industry Background

Global Supply Management

Global Supply Management is the set of activities that links a buyer of
goods and services with its suppliers, as well as helps a buyer to manage and
streamline the process through which it sources the goods and services it
purchases. We believe that a number of factors are driving the development of
GSM as a strategic tool in a companys procurement process.



| |  | Globalization
|- |  | -------------



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Market economies are expanding demand around the world, while technology is
accelerating suppliers abilities to provide lower cost, higher quality goods
and services.



| |  | Consolidation
|- |  | -------------



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Industries around the world are consolidating. Supply management is key to
realizing acquisition integration synergies.



| |  | Velocity
|- |  | --------



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Global competition and improved technology are shrinking new product
introduction and order-to-delivery times. These factors in turn require
companies to select the best suppliers and integrate them into their core
enterprise activities.



| |  | Outsourcing
|- |  | -----------



| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increasingly, companies are narrowing their focus on core activities and
outsourcing non-core activities to outside suppliers. As a result, a larger
portion of the final good or service is produced by someone other than the
original manufacturer.



| |  | Profitability
|- |  | -------------



| |                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Total cost savings driven by supply management can be dramatic. As margins
decrease, either due to higher costs or lower revenues, it becomes more
critical to achieve savings on supply management costs. Importantly, in a
weak economy, savings realized as a result of effective supply management can
exceed revenue growth.



| |  | Risk
|- |  | ----



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As supply chains become more complex through globalization, consolidation and
outsourcing, the probability of supply failures increases, creating higher
levels of risks for companies in terms of product innovation,
order-to-delivery times and customer satisfaction.

As a result of these factors, effective supply management can have a
dramatic impact on profitability and has become an increasingly important
enterprise function.

The Global Supply Management Process

GSM enables the enterprise to enhance the capabilities of its supply
management organization through effective management of its supply of goods and
services:





| |  | Supply Analysis and Strategy
|- |  | ----------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An enterprise must first determine what goods and services it needs, as well
as the strategies for how, when and from whom it should buy them. To
accomplish this, a company must analyze its spend, the performance and
abilities of its current suppliers and the trends in global supply markets.
Supply managers collaborate with engineering, manufacturing and other
enterprise functions to develop supply strategies in-line with future product
plans and enterprise strategy.

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| |  | Spend Requirements Management
|- |  | -----------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Once the supply strategy is determined, supply managers gather detailed spend
requirements from in-house users. These requirements can include technical
drawings and specifications, packaging, logistics, etc. Over time, supply
managers must analyze these spend requirements to decrease the total cost of
their supplies. Accurately gathering and maintaining these supplies over time
is a critical supply management activity.



| |  | Sourcing
| | - | --------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The next step is for supply managers to evaluate and select suppliers. The
sourcing process includes gathering and evaluating supplier capabilities,
communicating the necessary requirements and negotiating with suppliers
through various techniques. The sourcing process requires close collaboration
between supply managers in multiple locations and divisions to ensure maximum
bargaining power and process efficiency. We believe that supply managers
ultimately select suppliers based upon a total cost and risk evaluation.



| |  | Supplier Development
|- |  | --------------------



| |                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | After sourcing, an entity must formally qualify suppliers in terms of their
production, quality and management practices. If approved, the supply manager
works with the supplier as well as the internal users to transition the
supply of goods or services to them. Supply managers collaborate with
internal users and suppliers to guide and improve their capabilities over
time.



| |  | Supplier Relationship Management
|- |  | --------------------------------



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of the ongoing relationship, supply managers monitor supplier
performance and activity to ensure contract compliance, acceptable quality,
delivery, etc. Monitoring contract expirations helps supply managers
proactively manage their sourcing and supplier relationships.

FreeMarkets(R) GSM Solutions

Our solutions combine software, services and information, and are designed
to address the full range of supply management activities. These solutions are
designed to help companies lower costs and reduce their supply risks. Our
portfolio of GSM solutions includes:

FreeMarkets(R) FullSource(TM)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FreeMarkets FullSource is a program of technology-enhanced services designed
to help companies generate savings from their sourcing activities and lower
their supply risks. FreeMarkets FullSource combines online bidding technology
with services in hundreds of spend categories, industry-specific program
management, around-the-clock global market operations services, knowledge
about specific commodities and supply market dynamics. Through FullSource, we
help our customers identify and screen global suppliers and assemble a
request for quotation that provides detailed, clear and consistent
information for suppliers to use as a basis for their competitive bids. Since
1995, our customers have sourced over $70 billion of goods and services
through our FullSource offering. FullSource represented 66% of our 2003
revenues, and is expected to account for a majority of revenues in 2004.

FreeMarkets(R) QS(TM)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FreeMarkets QS is a hosted software application that enables companies to
create and run their own sourcing projects. We offer optional add-on services
designed to enhance the use of QS, and provide our customers with additional
capabilities that they may need to create effective online markets and
achieve their strategic sourcing objectives. Our QS software is available in
English, French, German, Italian, Spanish, Portuguese, Japanese and Chinese.

FreeMarkets(R) ES(TM)



| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FreeMarkets ES enables companies to perform global supply management
activities effectively and efficiently to reduce their total supply costs and
supplier risk. FreeMarkets ES contains software modules that facilitate
increased communication between

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| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | purchasers and the users of goods and services, enable purchasers to re-use
information, standardize sourcing processes and evaluation criteria and
facilitate the effective management of contract compliance.

FreeMarkets(R) Spend Visibility Solution



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FreeMarkets Spend Visibility Solution is an integrated offering that combines
analysis software with data collection, cleansing and enhancement services,
and provides companies visibility into what they spend globally on goods and
services.

FreeMarkets(R) Supplier Implementation Solution



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FreeMarkets Supplier Implementation Solution combines software and services
to help companies improve the speed and quality with which they engage and
interact with new suppliers to serve their operations.

FreeMarkets(R) Global Service Solutions



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | FreeMarkets offers a range of services to support its GSM solutions. These
solutions include support, consulting, sourcing and global education
services.

Competition

A number of companies provide GSM software and/or services. Competition in
this market is rapidly evolving, and we expect competition to intensify in the
future, which could lead to price reductions, reduced gross margins and loss of
market share. We currently or potentially will compete with a number of other
companies, including:



| |  |  | providers of enterprise software, extending their offerings to
include services or technology similar to ours;                     
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | professional service and consulting firms, and others offering
managed sourcing and supply management services similar to ours;
and
|
| |  |  | providers of stand-alone, self-service software products that make
available to buyers point-solution GSM technology.              

Employees

As of December 31, 2003, we had 967 employees worldwide, including 515 in
account management, global sourcing services and market operations, 145 in
research and development, 144 in sales and marketing, 72 in technical
operations and 91 in executive leadership, administration, human resources,
legal, finance and facilities management. Our global workforce consists of 702
team members in North America, 65 in Europe, 190 in Asia and Australia and 10
in South America. In January 2004, we eliminated 65 positions, or 7% of our
workforce to better align our cost structure with our anticipated future
revenues. None of our employees is represented by a collective bargaining
agreement, and we believe that we have good relations with our employees.

Corporate History

We were originally incorporated in 1995 as Online Markets Corporation.
We changed our name to FreeMarkets OnLine, Inc. shortly after our formation,
and then changed our name again in September 1999 to FreeMarkets, Inc.

Available Information

Our Internet address is www.freemarkets.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission.

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Additional Factors that May Affect Future Results

In January 2004, we announced a definitive agreement to enter into a merger
agreement with Ariba, Inc.; if we fail to complete the merger, our stock price
and future business operations could be harmed

If the merger is not completed for any reason, the price of our common
stock may decline insofar as the current price of our common stock reflects a
positive market assumption that the merger will be completed. In addition, if
the merger is not completed, we may be subject to a number of material risks,
including:



| |  |  | payment of a $17 million termination fee under certain
circumstances; and                                                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | costs related to the merger, such as financial advisory, legal
and accounting fees, the majority of which must be paid even if the
merger is not completed.

If the merger agreement is terminated, we may be unable to find a partner
willing to engage in a similar transaction on terms as favorable as those set
forth in the merger agreement, or at all. This could limit our ability to
pursue our strategic goals. In addition, while the merger agreement is in
effect, we are prohibited from soliciting, initiating or taking any other
action with respect to competing transactions, such as a merger, sale of assets
or other business combination, with any party other than unsolicited, written,
bona fide proposals or offers under specified terms and conditions.

Our customers may, in response to the announcement of the merger, delay or
defer decisions concerning our products. Any delay or deferral in those
decisions by our customers could have a material adverse effect on our
business, regardless of whether the merger is ultimately completed. Similarly,
current and prospective employees may experience uncertainty about their future
roles with the combined company until the combined companys strategies with
regard to all employees are announced or executed. This may adversely affect
our ability to attract and retain key management, sales, marketing and
technical personnel.

If the merger is terminated and our board of directors determines to seek
another partner or business combination, there can be no assurance that we will
be able to find a partner willing to pay an equivalent or more attractive price
than the price offered in the merger.

We cannot be certain that our new global supply management solutions will be
accepted in the marketplace

We are currently in the midst of a strategic transition from a company
that offers a single technology-enhanced service to a provider of a broader
range of software, services and information solutions. There are significant
risks associated with this strategy. The market for supply management products
is still evolving, and there can be no guarantee that our new products will
gain the market acceptance we anticipate. The technology is complex and may
contain undetected errors or defects that we may not be able to fix. Reduced
market acceptance of our services or software due to errors or defects in our
technology would reduce revenues and could damage our reputation in the
marketplace. In addition, our management has limited experience in managing a
multi-product company. The management challenges will be exacerbated by the
current weak economic environment and continued relatively low levels of
technology spending.

Our operating results are volatile and trends are difficult to predict; if we
fail to meet the expectations of public market analysts or investors, the
market price of our common stock may decline

Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. For example, over the past four
quarters ending December 31, 2003, our net loss has ranged from as high as
$11.8 million to as low as $4.6 million. Based on our transition to a new
business model and the continued weak state of the economy, you should not rely
upon our past quarterly operating results as indicators of future performance.
In addition, our operating results could fall below the expectations of
securities analysts or investors in some future quarter or quarters. As a
result, the price of our common stock may fall.

Our industry is highly competitive, and we cannot assure you that we will be
able to compete effectively

The Global Supply Management, or GSM, software and service solutions
industry is intensely competitive. If we cannot successfully compete, our
business will suffer reduced revenues and operating results. As one of a number
of companies providing GSM solutions to market, we face the risk that existing
and potential customers may choose to purchase competitors services or
products. If they do, then our revenues and operating results will be reduced.
Given that barriers to entry are relatively low, we expect competition to
intensify as new competitors enter the market.

5



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We have experienced revenue and fee concentration in the past; the loss of our
largest customers would reduce our revenues and fees and operating results, and
could cause our stock to fall

In 2002 and 2003, our top five customers and four customers, respectively,
comprised over 20% of our revenues and fees. The loss of any one of these
significant customers would reduce our revenues and fees and operating results,
and may cause a decrease in our stock price.

General economic conditions may adversely affect our future operations and
operating results

The
continued uncertainty in the global economy had an effect on our
operations in 2003, which resulted in a reduction in our FullSource online
market volume and contributed to a slowdown in the growth of our total
customers during the year. If the uncertainty surrounding the global
economy continues, customers
may continue to defer or postpone their purchasing decisions. The uncertainty may
have the effect of increasing the length of sales cycles for our products and
services. In addition, the amount of fixed monthly fees that we are able to
negotiate for new customers may be adversely affected based on lower
anticipated market volume from our customers. The amount of revenue we earn
from variable fees, such as performance incentive payments based on volume
and/or savings, may also decline as a result of lower volumes.

We have acquired in the past and may in the future acquire complementary
businesses or technologies; acquisitions may dilute our existing stockholders
and we may not achieve any of the benefits we would expect from an acquisition

If appropriate opportunities present themselves, we may acquire additional
businesses, technologies, services or products that we believe are strategic,
and any such acquisitions may be material in size. We may not be able to
successfully identify, negotiate or finance any future acquisition. Even if we
do succeed in acquiring a business, technology, service or product, we have
limited experience in integrating an acquisition into our business. The process
of integrating any acquired company may produce unforeseen operating
difficulties and expenditures, and may absorb significant attention of our
management that would otherwise be available for the ongoing development of our
business. Moreover, we may not achieve any of the benefits that we might
anticipate from an acquisition. If we make acquisitions, we may issue shares of
stock that dilute other stockholders, incur debt or assume contingent
liabilities. Any financing that we might need for acquisitions may only be
available to us on terms that restrict our business or that impose additional
costs that reduce our operating results.

We may write-down the unamortized goodwill from our acquisitions or the
investment in Adexa, Inc. (Adexa), which would reduce our financial results

We adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
and no longer record goodwill amortization. In connection with adopting this
standard, we determined that the carrying value of Surplus Record exceeded its
estimated fair value, as determined utilizing various valuation techniques
including discounted cash flow and comparative market analysis. We recorded an
impairment loss of $5.3 million in 2002 that was recognized as the cumulative
effect of an accounting change. The carrying value of goodwill on our
consolidated balance sheet as of December 31, 2003 was $2.0 million. In
accordance with SFAS No. 142, it is our policy to assess the potential
impairment of goodwill on an annual basis or earlier as circumstances dictate.
The recognition of any future impairment loss could have a material effect on
our financial results.

As part of the agreement to mutually terminate our proposed merger with
Adexa in 2001, we agreed to make an investment in Adexa in the amount of $6.0
million. We concluded in 2002 that there was an other-than-temporary decline in
the value of our investment based on a valuation determined by a financing
completed by Adexa. As a result, we recorded a $5.1 million loss on our
investment in 2002. The carrying value of the investment as of December 31,
2003 was $889,000. Any further write-downs of this investment based on
additional other-than-temporary declines in fair value could have a material
effect on our financial results.

In January 2004, we acquired the auction business of Covisint LLC for
$16.3 million. The acquisition is being accounted for as a purchase business
combination, and we anticipate recording a portion of the purchase price to
goodwill. Any future impairment loss of goodwill could have a material effect
on our financial results.

We have historically used more cash than we generate

Since our inception, our operating and investing activities have used more
cash than they have generated. We generated positive

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cash flows in 2003, and 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. However, if we are unable to control costs, our
resources may be depleted, and accordingly, our current resources may only be
sufficient for a shorter period. In either event, thereafter, we may find it
necessary to obtain additional financing. In the event that additional
financing is required, we may not be able to raise it on terms acceptable to
us, if at all.

We have historically generated losses

We achieved a modest profit in 1998, but incurred losses of $21.8 million,
$156.4 million, $295.2 million, $17.6 million and $30.9 million in 1999, 2000,
2001, 2002 and 2003, respectively, as a result of our efforts to invest in the
actual and anticipated growth of our business. Since our inception in 1995, we
have accumulated losses of $525.1 million. Our achievement of profitability in
the future will depend on whether we can implement the strategic transition
from a company that offers a single technology-enhanced service to one with
multiple software and service solutions and increase revenues while controlling
costs. We may not achieve profitability in the future, or sustain any future
profitability.

Customers may not purchase our services if we are unable to generate
significant savings

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

We may not be able to adjust our spending quickly; if we cannot, then our
operating results will be reduced

Our planned expense levels are relatively fixed in the short term and are
based on our anticipation of future revenues. We may not be able to accurately
forecast revenues. The difficulty of forecasting our revenues is increased due
to current challenging economic conditions that face many of our existing and
potential customers, and which may cause them to defer or postpone their
purchasing decisions in response to changes in their business. If we fail to
accurately predict revenues in relation to our planned expense levels, then we
may be unable to adjust our costs in a timely manner in response to
lower-than-expected revenues, and our operating results may be negatively
affected.

We may not be able to hire or retain qualified staff

If we cannot attract and retain adequate qualified and skilled staff, the
growth of our business may be limited. Our ability to provide software and
services to customers and grow our business depends, in part, on our ability to
attract and retain staff with college and graduate degrees, as well as
professional experiences that are relevant for sourcing, supply management,
software development and other functions we perform. Competition for personnel
with these skill sets is intense. Some technical job categories are under
conditions of severe shortage in the United States. In addition, restrictive
immigration quotas could prevent us from recruiting skilled staff from outside
the United States. We may not be able to recruit or retain the caliber of staff
required to carry out essential functions at the pace necessary to sustain or
grow our business. Our ability to recruit and retain qualified personnel may be
adversely affected by the decline in the price of our common stock. Stock
options are an important component of our overall compensation package and, in
current market conditions, may not provide appropriate incentives to our
current and prospective employees.

Our sales cycle is long and uncertain and may not result in revenues; factors
outside of our control may affect the decision to purchase our software and
services

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



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

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| |  |  | the strength of pre-existing supplier relationships;  
| | - |  | ------------------------------------------------------
|
| |  |  | competition from other providers of GSM solutions; and
|
| |  |  | an aversion to new purchasing methods.                

If our short-term agreements do not lead to long-term customer relationships,
our business may not be profitable

Frequently, we begin a relationship with a new customer by entering into a
short-term agreement that we hope will lead to a long-term agreement. Failure
to move a sufficient number of customers from short-term to long-term
agreements could hurt our operating results. For example, our initial agreement
with a customer for our FullSource offering usually involves a period of trial
and evaluation. This initial period, in which we learn about our customers
business and its related product categories, and educate our customer about the
best use of our products for its organization, requires a very significant
expenditure of our time and resources. A subsequent longer-term agreement is
often more productive given the parties are more familiar with each other, and
typically provides for higher gross margins. Customers may decide not to enter
into a long-term agreement with us, or may delay entering into such an
agreement until a later time. Because we invest a significant amount of time
and resources early in a customer relationship, our cost of revenues as a
percentage of revenues are typically higher at the outset of a relationship
than those which we may incur later. Further, we may be diverting personnel
from higher-margin opportunities to develop a new relationship, without any
assurance that the new relationship will endure. We expect similar purchasing
patterns to occur with our more recent offerings as customers become accustomed
to our new solutions.

Factors outside our control could result in disappointing market results;
disappointed customers may cancel or fail to renew their agreements with us

The actual savings achieved through the use of our solutions vary widely
and depend upon many factors outside of our control. These factors include:



| |  |  | the current state of supply and demand in the supply market for the
products and services being purchased;                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the past performance of our customers purchasing organization in
negotiating favorable terms with suppliers;                            
|
| |  |  | the willingness of a sufficient number of qualified suppliers to bid
for business using our solutions;                                   
|
| |  |  | reductions in the number of suppliers in particular markets due to
mergers, acquisitions or suppliers exiting from supply industries;
and
|
| |  |  | seasonal and cyclical trends that influence all purchasing decision
making.                                                              

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

Failures of hardware systems or software could undermine our customers
confidence in our reliability

A significant disruption in the availability of our technology could
seriously undermine our customers confidence in our business. Our customers
hold us to a high standard of reliability and performance. From time to time,
we have experienced service interruptions in our technology, with the most
significant being a breakdown in the connectivity between suppliers and our
technology. This connectivity is provided to us by an outside vendor, and this
kind of interruption may occur in the future. During these disruptions,
participants may lose their online connection or we may not receive their bids
or other information in a timely manner. Any interruptions in the availability
of our software, services or other information may undermine actual and
potential customers confidence in the reliability of our business.

Conducting online markets, as well as providing other Global Supply
Management software via the World Wide Web, requires the successful technical
operation of an entire chain of software, hardware and telecommunications
equipment. This chain includes our software, the personal computers and network
connections of suppliers and buyers, our network servers, operating systems,
databases

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and networking equipment such as routers. A failure of any element in this
chain can partially or completely disrupt the delivery of our solutions to
customers.

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

The loss of our key executives could disrupt our business

None of our executive officers or other key employees is bound by an
employment agreement. We rely on the leadership and vision of the executive
officers identified in this Form 10-K, and the loss of any of these executives
could disrupt our business.

If we fail to continually improve our technology, our business will suffer

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

If we do not adequately maintain our customers confidential information, our
reputation could be harmed and we could incur legal liability

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

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

If we are not able to adequately protect our intellectual property rights, then
others may be able to duplicate our services

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

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

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

Others may assert that our technology infringes their intellectual property
rights

We do not believe that we infringe the proprietary rights of others, but
we may be subject to infringement claims in the future. The defense of any
claims of infringement made against us by third parties could involve
significant legal costs and require our management to divert time from our
business operations. Either of these consequences of an infringement claim
could have a material adverse effect on our operating results. If we are
unsuccessful in defending any claims of infringement, we may be forced to
obtain licenses or to pay royalties to continue to use our technology. We may
not be able to obtain any necessary licenses on commercially reasonable terms
or at all. If we fail to obtain necessary licenses or other rights, or if these
licenses are too costly, our operating results may suffer either from
reductions in revenues through our inability to serve customers or from
increases in costs to license third-party technology.

Others may refuse to license important technology to us or may increase the
fees they charge us for this technology

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

Future government regulation of the Internet and online market services may add
to our operating costs

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

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

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

We may become subject to certain sales and other taxes that could adversely
affect our business

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

Our international operations subject us to risks and uncertainties

We face risks in doing business internationally. We provide our solutions
to international buyers and often have international suppliers use our
solutions and participate in our markets. We have locations in Europe, Asia,
Australia and South America that serve

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our customers based abroad, as well as the European, Asian, Australian and
South American operations of our multinational customers based in the United
States. We may establish similar locations in other parts of the world. We have
experienced, and expect to continue to experience, significant costs for our
international operations as we add staff and facilities in foreign countries.
These costs, together with the costs of the overhead needed to comply with
legal, regulatory and accounting requirements that differ from those in the
United States, may reduce our operating results. Finally, our international
operations are subject to disruption from political and economic instability in
the countries in which they are located, which may interrupt our ability to
conduct business and impose additional costs upon us.

We are subject to risks associated with currency fluctuations with respect
to our international sales and expenditures denominated in foreign currencies.
We hedge risks associated with foreign currency transactions in order to
minimize the impact of changes in foreign currency exchange rates. We utilize
forward contracts to hedge trade and intercompany receivables and payables.
All hedge contracts are marked to market through operations each period. There
can be no reasonable assurance that such hedging strategy will be successful
and that currency exchange rate fluctuations will not have a material adverse
effect on our operating results.

Our stock price is volatile, which could result in substantial losses for
stockholders

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

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding our executive
officers as of February 1, 2004.

|                   |  |     |    |             |  |                                                                         
|------------------ |  | --- | -- | ----------- |  | ------------------------------------------------------------------------
|Name               |  | Age |    | Position(s)
|                   |  |     |    |            
|Glen T. Meakem     |  |     | 40 |             |  | Founder and Chairman of the Board of Directors                          
|David H. McCormick |  |     | 38 |             |  | President, Chief Executive Officer and Director                         
|Sean M. Rollman    |  |     | 33 |             |  | Vice President, Controller,
Treasurer and
Acting Chief Financial Officer

Glen T. Meakemco-founded FreeMarkets in 1995 and has served as its
Chairman of the Board of Directors since inception. Mr. Meakem also held the
offices of President and Chief Executive Officer from FreeMarkets inception
until June 2000 and January 2003, respectively. Prior to co-founding
FreeMarkets, from May 1994 to February 1995, Mr. Meakem was employed as a
manager in the Corporate Business Development Group of General Electric Co.
From January 1992 through April 1994, he was employed as a consultant with
McKinsey & Company, Inc. Mr. Meakem earned his B.A. degree cum laude from
Harvard College and an M.B.A. from Harvard Business School.

David H. McCormickhas served as President since October 2002 and Chief
Executive Officer and a Director since January 2003. Before becoming President,
Mr. McCormick served as an Executive Vice President since May 2001, as Senior
Vice President and General Manager of Core Business Markets since June 2000 and
as Vice President and General Manager of Core Business Markets since December
1999. Prior to joining FreeMarkets, Mr. McCormick was a consultant with
McKinsey & Company, Inc. Mr. McCormick holds a B.S. in Mechanical Engineering
from the United States Military Academy and a Ph.D. in Public and International
Affairs from Princeton University.

Sean M. Rollmanhas served as Vice President, Treasurer and acting Chief
Financial Officer since October 2003 and as Controller since January 2000.
Before becoming Controller, Mr. Rollman served as Manager of Financial Planning
and Assistant Controller since April 1998. Prior to joining FreeMarkets, from
1992 to 1998, Mr. Rollman worked for Coopers & Lybrand as a Manager in
Assurance Services serving clients in the technology and real estate
industries. Mr. Rollman holds a B.S. in Accounting and Economics from Indiana
University of Pennsylvania.

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Item 2. Properties

Our corporate offices are located in leased space at FreeMarkets Center,
210 Sixth Avenue, Pittsburgh, Pennsylvania. The telephone number of our
principal executive office is (412) 434-0500.

Our headquarters in Pittsburgh, Pennsylvania currently occupy 128,000
square feet of office space under a lease covering 182,000 square feet that
expires in May 2010. Since January 1, 2003, we have abandoned a total of 54,000
square feet in our headquarters. We also lease office space in five other North
American metropolitan areas, as well as four in Europe, seven in Asia and
Australia and one in South America. We believe that our existing facilities in
Pittsburgh are adequate for our needs for the next several years. We may add
additional offices in the United States and in other countries as growth
opportunities present themselves, as well as from time to time abandon
locations that are no longer required to meet the needs of our business.




Item 3. Legal Proceedings

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

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




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

Not applicable.

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PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters

Market for the Companys Common Stock

Our common stock has been quoted on the Nasdaq National Market since
December 10, 1999 under the symbol FMKT. On February 1, 2004, the closing
price of our common stock was $9.21 per share. The following table sets forth
the range of high and low sales prices of our common stock for the periods
indicated.

|                      |      |  |                    |      |               |  |                    |      |                   |  |   |      |  |  |   |      | 
|--------------------- | ---- |  | ------------------ | ---- | ------------- |  | ------------------ | ---- | ----------------- |  | - | ---- |  |  | - | ---- | 
|                      |      |  | Three Months Ended
|                      |      |  |                   
|                      |      |  | March 31, 2003     |      | June 30, 2003 |  | September 30, 2003 |      | December 31, 2003
|                      |      |  |                    |      |               |  |                    |      |                  
|Price range per share |      |  |                    |      |               |  |                    |      |                   |  |   |      |  |  |   |     
|                      | Low  |  | $                  | 3.50 |               |  | $                  | 5.11 |                   |  | $ | 6.24 |  |  | $ | 5.30 | 
|                      | High |  | $                  | 6.64 |               |  | $                  | 7.77 |                   |  | $ | 9.86 |  |  | $ | 9.82 | 

|                      |      |  |                    |       |               |  |                    |       |                   |  |   |       |  |  |   |      | 
|--------------------- | ---- |  | ------------------ | ----- | ------------- |  | ------------------ | ----- | ----------------- |  | - | ----- |  |  | - | ---- | 
|                      |      |  | Three Months Ended
|                      |      |  |                   
|                      |      |  | March 31, 2002     |       | June 30, 2002 |  | September 30, 2002 |       | December 31, 2002
|                      |      |  |                    |       |               |  |                    |       |                  
|Price range per share |      |  |                    |       |               |  |                    |       |                   |  |   |       |  |  |   |     
|                      | Low  |  | $                  | 18.04 |               |  | $                  | 9.71  |                   |  | $ | 4.71  |  |  | $ | 4.49 | 
|                      | High |  | $                  | 29.09 |               |  | $                  | 23.38 |                   |  | $ | 14.10 |  |  | $ | 9.40 | 

As of February 1, 2004, there were approximately 427 holders of record of
our common stock. We believe that a substantially larger number of beneficial
owners hold shares of our common stock in depository or nominee form.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We do
not anticipate paying any cash dividends in the foreseeable future, as we
intend to retain any future earnings to finance the expansion of our business.
Moreover, our bank credit facility restricts our ability to pay cash dividends.

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Item 6. Selected Financial Data

|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |        |  
|-------------------------------------------- | ------------------------------------------------------- | - | ------------------------------------- | ------ | ---- | - | ------- | ------ | ---- | - | -------- | ------- | - | - | -------- | ------ | - | - | ------- | ------ | -
|                                             |                                                         |   | Year Ended December 31,              
|                                             |                                                         |   |                                      
|                                             |                                                         |   | 2003                                  |        | 2002 |   | 2001    |        | 2000 |   | 1999    
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |         
|                                             |                                                         |   | (in thousands, except per share data)
|Consolidated Statement of Operations
Data:   |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Revenues                                     |                                                         | $ | 138,716                               |        |      | $ | 170,441 |        |      | $ | 155,342  |         |   | $ | 90,467   |        |   | $ | 23,103  |       
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Operating costs and expenses:                |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|                                             | Cost of revenues                                        |   |                                       | 69,651 |      |   |         | 76,129 |      |   |          | 78,582  |   |   |          | 56,024 |   |   |         | 14,389 |  
|                                             | Research and development                                |   |                                       | 24,551 |      |   |         | 27,019 |      |   |          | 20,067  |   |   |          | 19,121 |   |   |         | 4,913  |  
|                                             | Sales and marketing                                     |   |                                       | 35,584 |      |   |         | 45,612 |      |   |          | 51,304  |   |   |          | 41,505 |   |   |         | 11,939 |  
|                                             | General and administrative                              |   |                                       | 21,425 |      |   |         | 23,674 |      |   |          | 32,086  |   |   |          | 33,720 |   |   |         | 9,294  |  
|                                             | Stock compensation and warrant costs                    |   |                                       | 6,783  |      |   |         | 7,998  |      |   |          | 8,569   |   |   |          | 6,411  |   |   |         | 5,200  |  
|                                             | Investment write-down                                   |   |                                       |       |      |   |         | 5,111  |      |   |          |        |   |   |          |       |   |   |         |       |  
|                                             | Restructuring charges                                   |   |                                       | 14,161 |      |   |         | (303   | )    |   |          | 6,432   |   |   |          |       |   |   |         |       |  
|                                             | Terminated merger-related costs                         |   |                                       |       |      |   |         |       |      |   |          | 3,385   |   |   |          |       |   |   |         |       |  
|                                             | Goodwill amortization and impairment (1)                |   |                                       |       |      |   |         |       |      |   |          | 252,031 |   |   |          | 90,749 |   |   |         |       |  
|                                             | Write-off of in-process research and
development        |   |                                       |       |      |   |         |       |      |   |          |        |   |   |          | 7,397  |   |   |         |       |  
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Total operating costs and expenses           |                                                         |   | 172,155                               |        |      |   | 185,240 |        |      |   | 452,456  |         |   |   | 254,927  |        |   |   | 45,735  |       
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Operating loss                               |                                                         |   | (33,439                               | )      |      |   | (14,799 | )      |      |   | (297,114 | )       |   |   | (164,460 | )      |   |   | (22,632 | )     
|                                             | Interest and other income, net                          |   |                                       | 3,733  |      |   |         | 3,243  |      |   |          | 2,665   |   |   |          | 8,409  |   |   |         | 833    |  
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Loss before taxes and change in
accounting   |                                                         |   | (29,706                               | )      |      |   | (11,556 | )      |      |   | (294,449 | )       |   |   | (156,051 | )      |   |   | (21,799 | )     
|                                             | Provision for income taxes                              |   |                                       | 1,188  |      |   |         | 712    |      |   |          | 782     |   |   |          | 361    |   |   |         | 22     |  
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Loss before change in accounting             |                                                         |   | (30,894                               | )      |      |   | (12,268 | )      |      |   | (295,231 | )       |   |   | (156,412 | )      |   |   | (21,821 | )     
|                                             | Cumulative effect of accounting change for
goodwill (1) |   |                                       |       |      |   |         | (5,327 | )    |   |          |        |   |   |          |       |   |   |         |       |  
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Net loss                                     |                                                         | $ | (30,894                               | )      |      | $ | (17,595 | )      |      | $ | (295,231 | )       |   | $ | (156,412 | )      |   | $ | (21,821 | )     
|                                             |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|Earnings per share before accounting change: |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|                                             | Basic and diluted                                       |   | $                                     | (0.74  | )    |   | $       | (0.30  | )    |   | $        | (7.48   | ) |   | $        | (4.21  | ) |   | $       | (1.46  | )
|Earnings per share after accounting change:  |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|                                             | Basic and diluted                                       |   | $                                     | (0.74  | )    |   | $       | (0.42  | )    |   | $        | (7.48   | ) |   | $        | (4.21  | ) |   | $       | (1.46  | )
|Weighted average shares:                     |                                                         |   |                                       |        |      |   |         |        |      |   |          |         |   |   |          |        |   |   |         |       
|                                             | Basic and diluted                                       |   |                                       | 42,002 |      |   |         | 41,553 |      |   |          | 39,492  |   |   |          | 37,189 |   |   |         | 14,914 |  

|                                          |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                          |  | As of December 31,
|                                          |  |                   
|                                          |  | 2003               |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                          |  |                    |         |      |  |      |         |      |  |     
|                                          |  | (in thousands)    
|Consolidated Balance Sheet Data:          |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and marketable investments           |  | $                  | 136,674 |      |  | $    | 135,023 |      |  | $    | 103,489 |  |  | $ | 121,148 |  |  | $ | 210,244 | 
|Working capital                           |  |                    | 108,850 |      |  |      | 119,218 |      |  |      | 88,622  |  |  |   | 108,873 |  |  |   | 208,850 | 
|Total assets                              |  |                    | 183,149 |      |  |      | 193,667 |      |  |      | 189,392 |  |  |   | 462,546 |  |  |   | 231,654 | 
|Long-term debt, excluding current portion |  |                    | 342     |      |  |      | 1,328   |      |  |      | 2,904   |  |  |   | 544     |  |  |   | 3,278   | 
|Total stockholders equity                |  |                    | 144,217 |      |  |      | 157,511 |      |  |      | 149,645 |  |  |   | 416,797 |  |  |   | 218,654 | 



---

|(1) |  | As described in Note 6 to the consolidated financial statements, the
Company adopted SFAS No. 142 Goodwill and Other Intangible Assets on
January 1, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 7. 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 consolidated
financial statements and related notes.

Overview

FreeMarkets provides software, services and solutions to help companies
improve their sourcing and supply management processes and enhance the
capabilities of their supply management organization. Our customers are buyers
of industrial parts, raw materials, commodities and services. As of December
31, 2003, we serve our customers from 17 locations in 13 countries on five
continents. Our team members provide services to customers in more than 35
languages through operations centers in Pittsburgh and Singapore.

Since our inception, FreeMarkets has provided software and services to
help companies identify savings, enhance their sourcing efficiency and achieve
their strategic sourcing goals by enabling them to source goods and services in
our online markets. In providing these services, we work with our customers to
identify and screen suppliers and to assemble a request for quotation that
provides detailed, clear and consistent information for suppliers to use in our
online markets. Our web-based technology enables suppliers from around the
world to submit bids for 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 the second half of
2002 and beginning of 2003, we introduced a number of new product offerings to
expand our solutions beyond sourcing to address a broader set of supply
management activities. Our development of a broader set of solutions in 2002
and 2003 is part of a strategic transition from a company that offers a single
technology-enhanced service to one with multiple software and service
solutions. These activities include supply analysis and strategy, spend
requirements management, sourcing, supplier development and supplier
relationship management. We refer to these activities as Global Supply
Management, or GSM.

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

Recent Events

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 sourcing and services assets of
Covisint, an independent e-business service provider for the global automotive
industry, for $16.3 million in cash.

Also in January 2004, we executed a restructuring plan resulting in the
elimination of 65 positions in our global workforce. Additionally, in February
2004, we evaluated our office space in Pittsburgh, Pennsylvania, and determined
that we will cease using one of the floors we currently lease in our global
headquarters. In accordance with SFAS No. 146, we will record a restructuring
charge of approximately $4.4 million in the first quarter of 2004, covering
these severance and lease costs.

Overview of 2003 Financial Results

Our operating results during 2003 should be considered within the context
of the macroeconomic environment and our transition to a provider of multiple
software and service solutions. Revenues decreased 19% from 2002 due to a
combination of factors, including a change in the mix of products and services
deployed by our customers, as well as the continued weak economic environment
which we believe has caused our customers to defer their purchasing decisions.
In 2003, several large customers renewed their FullSource access and service
agreements at lower market volumes than the volumes provided in previously
existing agreements, resulting in 33% lower revenues from our FullSource
offering in 2003. In addition, with the introduction of QS in early

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2001 and several other products in late 2002 and early 2003, several
FullSource-only customers have expanded their use of our products to include a
broader mix of FullSource, QS and related products. As customers gain
experience with our sourcing solutions, certain entities have migrated a
portion of their sourcing requirements to our self-service technologies. In
some cases, increased sales of additional products and services to existing
customers have resulted in lower total revenues due to this migration to our
self-service technologies.

Total operating expenses declined from 2002 primarily due to reduced
depreciation expense, cost cutting measures in discretionary spending such as
marketing and advertising, travel and recruiting, as well as a 3% decrease
in the average number of employees. We ended the year with 967 employees
versus 1,068 at December 31, 2002. Finally, total cash and investments
increased by approximately $1.7 million during 2003.

Critical Accounting Policies and Estimates

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

As discussed in Note 2 to our consolidated financial statements, we
generate revenues under service and access agreements with our customers. While
the vast majority of our agreements contain standard business terms and
conditions, there are many agreements that contain complex terms and
conditions. As a result, we are required to evaluate the scope and significance
of contract provisions in order to determine the appropriate accounting. In
addition, our revenue recognition policy requires an assessment as to whether
the collectibility is probable, which inherently requires us to evaluate the
creditworthiness of our customers.

Our FullSource service agreements typically provide revenues from fixed
monthly fees, and may also include performance incentive payments based on
volume and/or savings. The structure in a particular service agreement may
vary, depending upon the needs of our customer and the conventional practices
in the supply market where our customer obtains its materials, commodities or
services. The fees that we receive are for the use of our technology, supplier
and supply market information, sourcing operations staff and facilities.
Negotiated fees vary by customer, and reflect both the anticipated volume and
the staffing, expertise and technology we anticipate committing to complete the
services requested by our customers. We recognize revenues from our fixed
monthly FullSource fees ratably as we provide access to our services over the
related contract period. Our agreements range in length from a few months to as
many as five years. At any given time, we have agreements of varying lengths
with staggered expirations. Some of our agreements permit early termination
without cause by our customers without penalty.

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

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

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

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The majority of our customer agreements include multiple product and/or
service offerings. 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.

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

Stock compensation

As discussed in Note 2 to our consolidated financial statements, 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

We initially recorded a restructuring charge in Q2 2001 related to the
closing of three offices. 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. Lease abandonment costs for the abandoned facilities
were 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.

Determination of FullSource Market Volume and Achievable Savings

Revenues from our FullSource offering represented 66% and 69% of our
revenues and revenues and fees, respectively, in 2003. Therefore, we believe
that one indicator of our market acceptance is the dollar volume of materials,
commodities and services for which we create markets on behalf of our customers
as part of our FullSource offering. We measure this market volume by
multiplying the lowest bid price per unit in each market by the estimated
number of units that our customer expects to purchase. When our customers
specify multi-year purchases in a request for quotation, we calculate volume
for the estimated term. We do not report QS volume since this is a hosted
application that enables customers to create and run their own markets, and as
a result, we do not believe that volume from these markets can be adequately
validated.

FullSource market volume does not necessarily correlate with either our
revenues or our operating results in any particular period due to the
seasonality of our customers purchasing needs, the timing of the addition of
new customers and the length of our customer contracts. We anticipate that the
continued introduction of new products will further reduce the correlation of
FullSource volume and revenues in any particular period. FullSource volume has
varied in the past, and we expect it to vary in the future. The following table
sets forth our FullSource market volume for the periods indicated:

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|                         |  |                         |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |       | 
|------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                         |  | Year Ended December 31,
|                         |  |                        
|                         |  | 2003                    |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                         |  |                         |        |      |  |      |        |      |  |     
|                         |  | (in millions)          
|FullSource market volume |  | $                       | 18,847 |      |  | $    | 20,346 |      |  | $    | 16,669 |  |  | $ | 9,928 |  |  | $ | 2,725 | 

We believe that the savings identified by customers through our FullSource
markets is an indicator of the effectiveness of our FullSource offering. To
estimate these savings, we compare the last price paid by our customer for the
items in our markets against the lowest bid price for those items. Actual
savings that our customers achieve may not equal these estimates because our
customer may not select the lowest bid price, the parties may agree to change
price terms after our market or our customer may not actually buy all or any of
the items for which bids have been received in our markets.

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

Treatment of Visteon Fees

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

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

|                                               |  |                         |         |      |  |      |         |  |  |   |         | 
|---------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2003                    |         | 2002 |  | 2001
|                                               |  |                         |         |      |  |     
|                                               |  | (in thousands)         
|Revenues and fees                              |  | $                       | 151,109 |      |  | $    | 181,691 |  |  | $ | 166,592 | 
|Less fees characterized as payment for
warrant |  |                         | 12,393  |      |  |      | 11,250  |  |  |   | 11,250  | 
|                                               |  |                         |         |      |  |      |         |  |  |   |         | 
|Revenues                                       |  | $                       | 138,716 |      |  | $    | 170,441 |  |  | $ | 155,342 | 
|                                               |  |                         |         |      |  |      |         |  |  |   |         | 

Our relationship with Visteon is a standard customer relationship (except
for the warrant). We do not expect to recognize revenues under this Visteon
service contract from the fees we earn during the term of the contract, which
expires in 2005, because we have determined, as a result of a review by the
SEC, that we must allocate those fees as payment for the warrant that we
granted to Visteon.

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Results of Operations

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

|                                           |                                                     |  |                         |    |      |  |      |    |   |  |      |     | 
|------------------------------------------ | --------------------------------------------------- |  | ----------------------- | -- | ---- |  | ---- | -- | - |  | ---- | --- | 
|                                           |                                                     |  | Year Ended December 31,
|                                           |                                                     |  |                        
|                                           |                                                     |  | 2003                    |    | 2002 |  | 2001
|                                           |                                                     |  |                         |    |      |  |     
|Revenues                                   |                                                     |  | 100                     | %  |      |  | 100  | %  |   |  | 100  | %  
|Operating costs and expenses:              |                                                     |  |                         |    |      |  |      |    |   |  |      |    
|                                           | Cost of revenues                                    |  |                         | 50 |      |  |      | 45 |   |  |      | 51  | 
|                                           | Research and development                            |  |                         | 18 |      |  |      | 16 |   |  |      | 13  | 
|                                           | Sales and marketing                                 |  |                         | 26 |      |  |      | 27 |   |  |      | 33  | 
|                                           | General and administrative                          |  |                         | 15 |      |  |      | 14 |   |  |      | 21  | 
|                                           | Stock compensation and warrant costs                |  |                         | 5  |      |  |      | 4  |   |  |      | 5   | 
|                                           | Investment write-down                               |  |                         |   |      |  |      | 3  |   |  |      |    | 
|                                           | Restructuring charges                               |  |                         | 10 |      |  |      | (0 | ) |  |      | 4   | 
|                                           | Terminated merger-related costs                     |  |                         |   |      |  |      |   |   |  |      | 2   | 
|                                           | Goodwill amortization and impairment                |  |                         |   |      |  |      |   |   |  |      | 162 | 
|                                           |                                                     |  |                         |    |      |  |      |    |   |  |      |    
|Operating loss                             |                                                     |  | (24                     | )  |      |  | (9   | )  |   |  | (191 | )  
|                                           | Interest and other income, net                      |  |                         | 3  |      |  |      | 2  |   |  |      | 1   | 
|                                           |                                                     |  |                         |    |      |  |      |    |   |  |      |    
|Loss before taxes and change in accounting |                                                     |  | (21                     | )  |      |  | (7   | )  |   |  | (190 | )  
|                                           | Provision for income taxes                          |  |                         | 1  |      |  |      | 0  |   |  |      | 0   | 
|                                           |                                                     |  |                         |    |      |  |      |    |   |  |      |    
|Loss before change in accounting           |                                                     |  | (22                     | )  |      |  | (7   | )  |   |  | (190 | )  
|                                           | Cumulative effect of accounting change for goodwill |  |                         |   |      |  |      | (3 | ) |  |      |    | 
|                                           |                                                     |  |                         |    |      |  |      |    |   |  |      |    
|Net loss                                   |                                                     |  | (22                     | %) |      |  | (10  | %) |   |  | (190 | %) 
|                                           |                                                     |  |                         |    |      |  |      |    |   |  |      |    

Years Ended December 31, 2003 and 2002

Revenues

Revenues decreased 19% from $170.4 million in 2002 to $138.7 million in
2003. As discussed earlier in Treatment of Visteon Fees, we exclude from
revenues the fees earned from our contract with Visteon, which were $11.3
million and $12.4 million in 2002 and 2003, respectively. Revenues and fees
decreased 17% from $181.7 million in 2002 to $151.1 million in 2003. The
decrease in revenues is due to a combination of factors, including a change in
the mix of products and services deployed by our customers, as well as the
continued weak economic environment which we believe has caused our customers
to defer their purchasing decisions. In 2003, several large customers renewed
their FullSource access and service agreements at lower market volumes than the
volumes provided in previously existing agreements, resulting in 33% lower
revenues from our FullSource offering in 2003. As an indicator of our
decreased services, our FullSource market volume decreased 7% from $20.3
billion in 2002 to $18.8 billion in 2003. In addition, with the introduction of
QS in early 2001 and several other products in late 2002 and early 2003,
several FullSource-only customers have expanded their use of our products to
include a broader mix of FullSource, QS and related products. As customers gain
experience with our sourcing solutions, certain entities have migrated a
portion of their sourcing requirements to our self-service technologies. In
some cases, increased sales of additional products and services to existing
customers have resulted in lower total revenues due to this migration. We
anticipate that our FullSource offering will continue to account for a majority
of our revenues in 2004. However, the percentage of total revenues
and absolute dollars attributable to
FullSource will continue to decrease, but at a lower rate than
experienced in 2003. We also expect to see continued growth in sales
of our QS and other product offerings to current and
new customers.

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

|               |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|-------------- |  | ----------------- | ------- | ----------------- |  | - | --- | ---------- |  | - | ------- |  |  |  | --- | -
|               |  | Year Ended        |         | Year Ended       
|               |  | December 31, 2003 |         | December 31, 2002
|               |  |                   |         |                  
|               |  | $                 |         | % of Total        |  | $ |     | % of Total
|               |  |                   |         |                   |  |   |     |           
|FullSource     |  | $                 | 92,093  |                   |  |   | 66  | %          |  | $ | 138,420 |  |  |  | 81  | %
|All other      |  |                   | 46,623  |                   |  |   | 34  |            |  |   | 32,021  |  |  |  | 19  |  
|               |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|Total revenues |  | $                 | 138,716 |                   |  |   | 100 | %          |  | $ | 170,441 |  |  |  | 100 | %
|               |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  

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

|                        |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|----------------------- |  | ----------------- | ------- | ----------------- |  | - | --- | ---------- |  | - | ------- |  |  |  | --- | -
|                        |  | Year Ended        |         | Year Ended       
|                        |  | December 31, 2003 |         | December 31, 2002
|                        |  |                   |         |                  
|                        |  | $                 |         | % of Total        |  | $ |     | % of Total
|                        |  |                   |         |                   |  |   |     |           
|FullSource              |  | $                 | 104,486 |                   |  |   | 69  | %          |  | $ | 149,670 |  |  |  | 82  | %
|All other               |  |                   | 46,623  |                   |  |   | 31  |            |  |   | 32,021  |  |  |  | 18  |  
|                        |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|Total revenues and fees |  | $                 | 151,109 |                   |  |   | 100 | %          |  | $ | 181,691 |  |  |  | 100 | %
|                        |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  

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Also included in revenues are reimbursements of $5.1 million in 2002 and
$3.7 million in 2003. An equivalent amount of reimbursable expenses is included
in cost of revenues.

Operating costs and expenses

Cost of revenues.Cost of revenues decreased from $76.1 million, or 45%
of revenues in 2002 to $69.7 million, or 50% of revenues in 2003. The increase
in cost of revenues as a percentage of revenues from 2002 to 2003 is primarily
the result of the 19% decrease in revenues, partially offset by a 9% overall
decrease in cost of revenues. The decrease in absolute dollar amounts from 2002
to 2003 is primarily attributable to: (1) reduced overhead in the amount of
$3.5 million, primarily comprised of reduced depreciation expense in the amount
of $4.0 million due to reduced capital expenditures over the past four years.
The reduction in capital expenditures in 2002 and 2003 compared to 2000 and
2001 is primarily due to our investment in the growth of our business in 2000
and 2001; (2) cost cutting measures in discretionary spending such as travel
costs and reimbursements in the amount of $1.8 million; and (3) reduced
compensation and benefits expenses in the amount of $1.4 million, primarily due
to a 4% decrease in the average number of account management, global sourcing
services and market operations staff resulting from the 2003 restructuring
activities described below. 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
$27.0 million, or 16% of revenues in 2002, to $24.6 million, or 18% of revenues
in 2003. The decrease in absolute dollars and a percentage of revenues is
primarily attributable to reduced consulting costs in the amount of $4.0
million in 2003 compared to 2002, associated with the investments in our
product development pipeline in 2002, partially offset by an increase in
compensation and benefits expense in the amount of $2.1 million, primarily due
to a 23% increase in average research and development staff in 2003.

Sales and marketing.Sales and marketing costs decreased from $45.6
million, or 27% of revenues in 2002, to $35.6 million, or 26% of revenues in
2003. The decrease is primarily attributable to: (1) cost cutting measures in
discretionary spending such as marketing and advertising in the amount of $3.4
million and recruiting and relocation costs in the amount of $508,000; (2)
reduced overhead in the amount of $2.8 million, primarily comprised of reduced
depreciation expense in the amount of $1.5 million; and (3) reduced
compensation and benefits expenses in the amount of $2.7 million, primarily due
to a 15% decrease in the average number of sales and marketing staff resulting
from the 2003 restructuring activities described below.

General and administrative.General and administrative costs decreased
from $23.7 million, or 14% of revenues in 2002, to $21.4 million, or 15% of
revenues in 2003. The decrease in absolute dollars is primarily attributable
to: (1) reduced operating taxes in the amount of $1.2 million, partially due to
reduced revenues in 2003 as compared to 2002; (2) reduced compensation and
benefits expense in the amount of $838,000, primarily due to a 9% decrease in
the average number of personnel in the areas of human resources, finance and
facilities management in 2003 compared to 2002 resulting from the 2003
restructuring activities described below; and (3) reduced overhead in the
amount of $625,000, primarily comprised of reduced depreciation expense.

Stock compensation and warrant costs.We recorded $2.0 million of
unearned stock compensation related to employee stock options granted in June
and July 1999, which is being amortized over a five-year period ending June
2004. In 2002 and 2003, $150,000 and $80,000, respectively, was amortized
related to these grants. 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 2002 and
2003, $19.1 million was amortized related to this warrant, with $11.3 million
and $12.4 million reflected as a reduction to our revenues in 2002 and 2003,
respectively (reducing the revenues under the Visteon service contract to zero)
and $7.8 million and $6.7 million as stock compensation and warrant costs in
2002 and 2003, respectively.

Investment write-down.In Q1 2002, we recorded a $4.7 million loss on our
investment in Adexa based on our review of its financial results and general
market conditions. In Q3 2002, we recorded an additional $371,000 loss on our
investment in Adexa based on a valuation determined by financing completed by
Adexa in July 2002. We concluded after each of these reviews that there was an
other-than-temporary decline in the value of our investment in Adexa. As of
December 31, 2003, the remaining carrying value of our original $6.0 million
investment in Adexa was $889,000.

Restructuring charges.In 2002, we re-commenced use of office space
included in the 2001 restructuring program and revised our estimate for
employee severance and termination benefit costs. As a result, we reduced the
restructuring reserve by $303,000.

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Throughout 2003, we initiated three restructuring programs. These
programs 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 $13.0 million as a result of these
programs. The following is a summary of these programs:

Workforce Reduction Plan.In Q1 2003, in response to the continued
economic slowdown, we executed a restructuring plan resulting in the
elimination of 79 positions in our 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.

Facility Reduction Plan.Also in 2003, we reassessed 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 December 31,
2003, $674,000 of the $4.3 million accrual for lease costs will be paid in
2004, and is therefore classified as a current liability in our consolidated
balance sheet.

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

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
elimination of 74 positions in our European business. We recorded a
restructuring charge of $3.2 million in Q3 2003 covering these severance costs
and legal fees. While most of the severance costs have been paid in accordance
with local employment laws, we expect to pay the remaining severance portion of
the restructuring accrual of $93,000 in Q1 2004.

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 we estimated
sublease income based on current real estate market conditions. As of December
31, 2003, all employees to be terminated as a result of the restructuring have
been notified. We expect to pay the remaining restructuring accrual relating to
severance and implementation in the amount of $917,000 over the next few
quarters. The accrual for lease costs (net of anticipated sub-lease proceeds)
will be paid over the lease term through August 2006. As of December 31, 2003,
$1.0 million of the $1.8 million accrual for lease costs will be paid in 2004,
and is therefore classified as a current liability in our consolidated balance
sheet.

The following table sets forth an analysis of the restructuring accrual
activity for the three years ended December 31, 2003:

|                                 |                                   |  |                         |       |                         |  |               |       |               |  |            |       |       |  |        |       |  |  |        |       |  |  |        |       | 
|-------------------------------- | --------------------------------- |  | ----------------------- | ----- | ----------------------- |  | ------------- | ----- | ------------- |  | ---------- | ----- | ----- |  | ------ | ----- |  |  | ------ | ----- |  |  | ------ | ----- | 
|                                 |                                   |  | 2003 Restructuring Plan |       | 2001 Restructuring Plan
|                                 |                                   |  |                         |       |                        
|                                 |                                   |  | Workforce               |       | Facility                |  | European      |       |               |  |            |       |       |  |        |       |  |  |       
|                                 |                                   |  | Reduction               |       | Reduction               |  | Restructuring |       | Severance and |  | Facilities |       |       |  |       
|                                 |                                   |  | Plan                    |       | Plan                    |  | Plan          |       | Benefits      |  | Related    |       | Total
|                                 |                                   |  |                         |       |                         |  |               |       |               |  |            |       |      
|Restructuring charge in 2001:    |                                   |  |                         |       |                         |  |               |       |               |  |            |       |       |  |        |       |  |  |        |       |  |  |        |      
|                                 | Severance and benefits            |  | $                       |      |                         |  | $             |      |               |  | $          |      |       |  | $      | 2,347 |  |  | $      |      |  |  | $      | 2,347 | 
|                                 | Accrued lease costs               |  |                         |      |                         |  |               |      |               |  |            |      |       |  |        |      |  |  |        | 1,719 |  |  |        | 1,719 | 
|                                 | Property and equipment impairment |  |                         |      |                         |  |               |      |               |  |            |      |       |  |        |      |  |  |        | 2,179 |  |  |        | 2,179 | 
|                                 | Implementation costs              |  |                         |      |                         |  |               |      |               |  |            |      |       |  |        |      |  |  |        | 187   |  |  |        | 187   | 
|Cash paid                        |                                   |  |                        |       |                         |  |              |       |               |  |           |       |       |  | (2,164 | )     |  |  | (1,226 | )     |  |  | (3,390 | )    
|Non-cash charges                 |                                   |  |                        |       |                         |  |              |       |               |  |           |       |       |  |       |       |  |  | (2,179 | )     |  |  | (2,179 | )    
|                                 |                                   |  |                         |       |                         |  |               |       |               |  |            |       |       |  |        |       |  |  |        |       |  |  |        |       | 
|Balance as of December 31, 2001  |                                   |  |                        |       |                         |  |              |       |               |  |           |       |       |  | 183    |       |  |  | 680    |       |  |  | 863    |      
|Cash paid                        |                                   |  |                        |       |                         |  |              |       |               |  |           |       |       |  | (31    | )     |  |  | (410   | )     |  |  | (441   | )    
|Restructuring accrual adjustment |                                   |  |                        |       |                         |  |              |       |               |  |           |       |       |  | (152   | )     |  |  | (151   | )     |  |  | (303   | )    
|                                 |                                   |  |                         |       |                         |  |               |       |               |  |            |       |       |  |        |       |  |  |        |       |  |  |        |       | 
|Balance as of December 31, 2002  |                                   |  |                        |       |                         |  |              |       |               |  |           |       |       |  |       |       |  |  | 119    |       |  |  | 119    |      
|Restructuring charge in 2003:    |                                   |  |                         |       |                         |  |               |       |               |  |            |       |       |  |        |       |  |  |        |       |  |  |        |      
|                                 | Severance and benefits            |  |                         | 1,754 |                         |  |               |      |               |  |            | 3,979 |       |  |        |      |  |  |        |      |  |  |        | 5,733 | 
|                                 | Accrued lease costs               |  |                         |      |                         |  |               | 4,642 |               |  |            | 1,842 |       |  |        |      |  |  |        |      |  |  |        | 6,484 | 

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|                                |                                   |   |                         |   |                         |   |               |     |               |   |            |       |       |   |   |   |  |   |      |   |  |   |        |       | 
|------------------------------- | --------------------------------- | - | ----------------------- | - | ----------------------- | - | ------------- | --- | ------------- | - | ---------- | ----- | ----- | - | - | - |  | - | ---- | - |  | - | ------ | ----- | 
|                                |                                   |   | 2003 Restructuring Plan |   | 2001 Restructuring Plan
|                                |                                   |   |                         |   |                        
|                                |                                   |   | Workforce               |   | Facility                |   | European      |     |               |   |            |       |       |   |   |   |  |   |     
|                                |                                   |   | Reduction               |   | Reduction               |   | Restructuring |     | Severance and |   | Facilities |       |       |   |  
|                                |                                   |   | Plan                    |   | Plan                    |   | Plan          |     | Benefits      |   | Related    |       | Total
|                                |                                   |   |                         |   |                         |   |               |     |               |   |            |       |      
|                                | Property and equipment impairment |   |                         |  |                         |   |               | 371 |               |   |            | 1,190 |       |   |   |  |  |   |      |  |  |   |        | 1,561 | 
|                                | Implementation costs              |   |                         |  |                         |   |               |    |               |   |            | 383   |       |   |   |  |  |   |      |  |  |   |        | 383   | 
|Cash paid                       |                                   |   | (1,754                  | ) |                         |   | (324          | )   |               |   | (3,442     | )     |       |   |  |   |  |   | (119 | ) |  |   | (5,639 | )    
|Non-cash charges                |                                   |   |                        |   |                         |   | (371          | )   |               |   | (1,190     | )     |       |   |  |   |  |   |     |   |  |   | (1,561 | )    
|                                |                                   |   |                         |   |                         |   |               |     |               |   |            |       |       |   |   |   |  |   |      |   |  |   |        |       | 
|Balance as of December 31, 2003 |                                   | $ |                        |   |                         | $ | 4,318         |     |               | $ | 2,762      |       |       | $ |  |   |  | $ |     |   |  | $ | 7,080  |      
|                                |                                   |   |                         |   |                         |   |               |     |               |   |            |       |       |   |   |   |  |   |      |   |  |   |        |       | 

Interest and other income, net

Interest and other income, net was $3.2 million in 2002 and $3.7 million
in 2003. The increase was primarily attributable to cash collections of
$850,000 from the settlement of patent infringement lawsuits and an increase in
gains from foreign exchange contracts in the amount of $465,000, partially
offset by reduced interest income from a lower weighted-average rate of return
due to general market conditions. In 2002, we earned $3.1 million at a
weighted-average rate of return of 2.6%, compared to $2.2 million at a rate of
return of 1.6% in 2003.

Provision for income taxes

Provision for income taxes was $712,000 in 2002 and $1.2 million in 2003.
The increase is primarily attributable to increased foreign income taxes in
2003 compared to 2002.

Cumulative effect of accounting change for goodwill

In Q1 2002, in connection with the implementation of SFAS No. 142,
Goodwill and Other Intangible Assets, we tested goodwill related to Surplus
Record for impairment, and based on estimated future cash flows, recorded an
impairment charge of $5.3 million. We completed our annual test for impairment
in Q1 2003 and concluded at that time, that we did not have any impairment of
goodwill based on the estimated fair value as determined by discounted cash flows. For further
discussion, see Note 6 to the consolidated financial statements.

Years Ended December 31, 2002 and 2001

Revenues

Revenues increased 10% from $155.3 million in 2001 to $170.4 million in
2002. As discussed earlier in Treatment of Visteon Fees, we exclude from
revenues the fees earned from our contract with Visteon, which were $11.3
million in each of 2001 and 2002. Revenues and fees increased 9% from $166.6
million in 2001 to $181.7 million in 2002. The increase in revenues and fees is
primarily attributable to the introduction of our QS offering in early 2001.
The increased revenues were also attributable to an increased use of our
FullSource services by existing customers, as well as the addition of new
customers for which we conducted online markets. The number of customers
served, including all of our products and services, increased 12% from 125 in
2001 to 140 in 2002. As an indicator of our increased services, our FullSource
market volume grew 22% from $16.7 billion in 2001 to $20.3 billion in 2002.

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

|               |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|-------------- |  | ----------------- | ------- | ----------------- |  | - | --- | ---------- |  | - | ------- |  |  |  | --- | -
|               |  | Year Ended        |         | Year Ended       
|               |  | December 31, 2002 |         | December 31, 2001
|               |  |                   |         |                  
|               |  | $                 |         | % of Total        |  | $ |     | % of Total
|               |  |                   |         |                   |  |   |     |           
|FullSource     |  | $                 | 138,420 |                   |  |   | 81  | %          |  | $ | 143,336 |  |  |  | 92  | %
|All other      |  |                   | 32,021  |                   |  |   | 19  |            |  |   | 12,006  |  |  |  | 8   |  
|               |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|Total revenues |  | $                 | 170,441 |                   |  |   | 100 | %          |  | $ | 155,342 |  |  |  | 100 | %
|               |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  

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

|                        |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|----------------------- |  | ----------------- | ------- | ----------------- |  | - | --- | ---------- |  | - | ------- |  |  |  | --- | -
|                        |  | Year Ended        |         | Year Ended       
|                        |  | December 31, 2002 |         | December 31, 2001
|                        |  |                   |         |                  
|                        |  | $                 |         | % of Total        |  | $ |     | % of Total
|                        |  |                   |         |                   |  |   |     |           
|FullSource              |  | $                 | 149,670 |                   |  |   | 82  | %          |  | $ | 154,586 |  |  |  | 93  | %
|All other               |  |                   | 32,021  |                   |  |   | 18  |            |  |   | 12,006  |  |  |  | 7   |  
|                        |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  
|Total revenues and fees |  | $                 | 181,691 |                   |  |   | 100 | %          |  | $ | 166,592 |  |  |  | 100 | %
|                        |  |                   |         |                   |  |   |     |            |  |   |         |  |  |  |     |  

Although customers and FullSource volume increased from 2001 to 2002, revenues
per customer have decreased over the same period. This decrease is primarily
related to a more diversified international mix of customers, as well as a
change in the mix of products and services deployed by our customers. With the
introduction of QS in early 2001, several FullSource-only customers have
expanded their use of our products to include a broader mix of FullSource, QS
and QS services. As customers gain experience with

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our sourcing solutions, certain entities have migrated a portion of their
sourcing requirements to our self-service technologies. In some cases,
increased sales of additional products and services to existing customers have
resulted in lower total revenues due to this migration.

Also included in revenues are reimbursements of $7.7 million in 2001 and
$5.1 million in 2002. An equivalent amount of reimbursable expenses is included
in cost of revenues.

Operating costs and expenses

Cost of revenues.Cost of revenues decreased from $78.6 million in 2001
to $76.1 million in 2002. As a percentage of revenues, cost of revenues
decreased from 51% in 2001 to 45% in 2002. The decrease in absolute dollar
amounts and as a percentage of revenues from 2001 to 2002 is primarily the
result of increased staff productivity as our personnel became more specialized
in various sourcing activities, as well as a decrease in incentive compensation
in 2002. Also, we have attained some operating efficiencies from our
investments in information tools to automate portions of our sourcing process,
as well as organizing our sourcing staff in such a way to take advantage of our
domain expertise in various supply markets. The decrease is also attributable
to: (1) cost cutting measures in discretionary spending such as travel costs,
reimbursements and recruiting costs in the amount of $4.7 million; (2) reduced
provision for bad debts in the amount of $1.6 million, primarily due to
improvements in days sales outstanding; and (3) reduction in incentive
compensation costs in the amount of $1.0 million. Although our provision for
bad debts was lower in 2002, the allowance for doubtful accounts in our
consolidated balance sheet increased due to timing of an unusually large
write-off against the allowance in 2001. The decrease in cost of revenue is
partially offset by an increase in compensation and benefits expenses in the
amount of $2.8 million, primarily due to a 6% increase in the average number of
account management, global sourcing services and market operations staff. 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 increased from
$20.1 million, or 13% of revenues in 2001, to $27.0 million, or 16% of revenues
in 2002. The increase was primarily related to an increase in compensation and
benefits expense in the amount of $2.1 million, primarily due to a 24% increase
in average research and development staff in 2002 and increased consulting fees
in the amount of $3.4 million to fund ongoing investments in our product
development pipeline. These increases are partially offset by a reduction in
incentive compensation costs in the amount of $533,000.

Sales and marketing.Sales and marketing costs decreased from $51.3
million, or 33% of revenues in 2001, to $45.6 million, or 27% of revenues in
2002. The decrease is primarily attributable to cost cutting measures in
discretionary spending such as marketing and advertising, recruiting and
relocation costs in the amount of $4.0 million. The decrease is also
attributable to a decrease in compensation and benefits expense in the amount
of $795,000 primarily due to a slight decrease in the average number of sales
and marketing staff.

General and administrative.General and administrative costs decreased
from $32.1 million, or 21% of revenues in 2001, to $23.7 million, or 14% of
revenues in 2002. The decrease is primarily attributed to an 18% decrease in
the average number of personnel in the areas of human resources, finance and
facilities management in 2002 compared to 2001. The decrease is also
attributable to: (1) reduced tax consulting costs associated with our
international expansion in 2000 and 2001 in the amount of $701,000; (2) reduced
legal costs incurred in connection with the class action lawsuits filed against
the Company in 2001 in the amount of $462,000; (3) cost cutting measures in
discretionary spending such as travel, recruiting and relocation costs in the
amount of $1.7 million; and (4) reduced incentive compensation costs in the
amount of $193,000.

Stock compensation and warrant costs.We recorded $2.0 million of
unearned stock compensation related to employee stock options granted in June
and July 1999, which is being amortized over a five-year period ending June
2004. In 2001 and 2002, $253,000 and $150,000, respectively, was amortized
related to these grants. 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 2001 and
2002, $19.1 million was amortized related to this warrant, with $11.3 million
reflected as a reduction to our revenues (reducing the revenues under the
Visteon service contract to zero) and $7.8 million as stock compensation and
warrant costs. In 2001, $470,000 of stock compensation was recorded primarily
due to modifications of stock options held by former employees.

Investment write-down.In Q1 2002, we recorded a $4.7 million loss on our
investment in Adexa based on our review of its financial results and general
market conditions. In Q3 2002, we recorded an additional $371,000 loss on our
investment in Adexa based on a valuation determined by financing completed by
Adexa in July 2002. We concluded after each of these reviews that there

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was an other-than-temporary decline in the value of our investment in
Adexa. As of December 31, 2002, the remaining carrying value of our original
$6.0 million investment in Adexa was $889,000.

Restructuring charges.In 2001, we recorded a $6.4 million restructuring
charge covering the severance and facility closing costs related to our Austin
office, as well as severance costs associated with other employees who were
terminated. In 2002, we re-commenced use of office space and revised for
employee severance and termination benefit costs. As a result of these reviews,
we reduced the restructuring reserve by $303,000.

Terminated merger-related costs.In February 2001, we signed a merger
agreement to acquire Adexa. In June 2001, the parties mutually agreed to
terminate their proposed merger without payment of any termination fees. We
incurred merger-related costs of approximately $3.4 million related to
financial advisor and other professional fees, which were all expensed in 2001.

Goodwill amortization and impairment.In connection with our acquisitions
of iMark and Surplus Record in March 2000, we recorded goodwill of $354.3
million, of which $47.8 million was amortized in 2001. In Q2 2001, we
re-evaluated our product and technology strategy and determined that we would
no longer use the technology platform or the market strategy that we acquired
with iMark. As a result of this determination and the closing of our Austin
facility, we recorded a $204.3 million impairment charge in Q2 2001. In Q1
2002, we adopted SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets, and no longer record goodwill
amortization.

Interest and other income, net

Interest and other income, net was $2.7 million in 2001 and $3.2 million
in 2002. The increase was primarily attributable to increased average cash and
marketable investment balances, partially offset by a reduced weighted-average
rate of return due to general market conditions. In 2001, we earned $4.5
million at a weighted-average rate of return of 4.0%, compared to $3.1 million
at a rate of return of 2.6% in 2002. Interest and other income in 2001 was
partially offset by asset write-offs of $500,000.

Provision for income taxes

Provision for income taxes was $782,000 in 2001 and $712,000 in 2002. The
decrease is primarily attributable to reduced foreign income taxes in 2002
compared to 2001.

Cumulative effect of accounting change for goodwill

In Q1 2002, in connection with the implementation of SFAS No. 142,
Goodwill and Other Intangible Assets, we tested goodwill related to Surplus
Record for impairment, and based on estimated future cash flows, recorded an
impairment charge of $5.3 million. For further discussion, see Note 6 to the
consolidated financial statements.

Liquidity and Capital Resources

|                                     |                            |   |                  |         |        |   |         |       |        |   |         |         |  |       |         |        |  |    |         |         | 
|------------------------------------ | -------------------------- | - | ---------------- | ------- | ------ | - | ------- | ----- | ------ | - | ------- | ------- |  | ----- | ------- | ------ |  | -- | ------- | ------- | 
|                                     |                            |   | 2003             |         | Change |   | 2002    |       | Change |   | 2001   
|                                     |                            |   |                  |         |        |   |         |       |        |   |        
|                                     |                            |   | ($ in thousands)
|Cash and cash equivalents            |                            | $ | 102,935          |         |        | $ | 8,342   |       |        | $ | 94,593  |         |  | $     | 14,111  |        |  | $  | 80,482  |        
|Marketable investments               |                            |   | 33,739           |         |        |   | (6,691  | )     |        |   | 40,430  |         |  |       | 17,423  |        |  |    | 23,007  |        
|                                     |                            |   |                  |         |        |   |         |       |        |   |         |         |  |       |         |        |  |    |         |        
|                                     | Total cash and investments |   | $                | 136,674 |        |   | $       | 1,651 |        |   | $       | 135,023 |  |       | $       | 31,534 |  |    | $       | 103,489 | 
|                                     |                            |   |                  |         |        |   |         |       |        |   |         |         |  |       |         |        |  |    |         |        
|                                     | Percentage of total assets |   |                  | 75      | %      |   | 5pts    |       |        |   | 70      | %       |  | 15pts |         |        |  | 55 | %      
|Working capital                      |                            | $ | 108,850          |         |        | $ | (10,368 | )     |        | $ | 119,218 |         |  | $     | 30,596  |        |  | $  | 88,622  |        
|Days sales outstanding (DSO)         |                            |   | 60               |         |        |   |         |       |        |   | 57      |         |  |       |         |        |  |    | 65      |        
|Cash flows from operating activities |                            | $ | (2,256           | )       |        | $ | (23,540 | )     |        | $ | 21,284  |         |  | $     | 36,033  |        |  | $  | (14,749 | )      
|Cash flows from investing activities |                            | $ | 1,877            |         |        | $ | 26,396  |       |        | $ | (24,519 | )       |  | $     | (48,902 | )      |  | $  | 24,383  |        
|Cash flows from financing activities |                            | $ | 8,721            |         |        | $ | (8,625  | )     |        | $ | 17,346  |         |  | $     | (511    | )      |  | $  | 17,857  |        

Net cash used in operating activities totaled $14.7 million in 2001 and
$2.3 million in 2003, compared to net cash provided by operating activities of
$21.3 million in 2002. The use of cash in 2001 related primarily to the
operating losses generated by our investment in the growth of our business.
Improved cash provided by operating activities in 2002 was due to cash
collections on revenues that were 10% higher than 2001 and improved DSOs in
2002 compared to 2001. Additionally, operating costs decreased in 2002. This
was primarily attributable to a reduction in goodwill amortization, as well as
cost cutting measures in discretionary spending such as marketing and
advertising, travel, recruiting and relocation costs, as well as reduced
incentive compensation costs. The use of cash in 2003 related primarily to
operating losses resulting from the 19% decrease in revenues from 2002 to 2003.
The use of cash in 2003 is also attributable to the increase in DSOs from 57
days to 60 days in 2002 and 2003, respectively. Net cash from

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operating activities in 2001, 2002 and 2003 does not reflect $10.3
million, $12.2 million and $12.2 million, respectively, received under our
service contract with Visteon.

Net cash provided by investing activities totaled $24.4 million in 2001
and $1.9 million in 2003, compared to net cash used in investing activities of
$24.5 million in 2002. In 2001, 2002 and 2003, we incurred $17.3 million, $6.9
million and $4.7 million, respectively, of capital expenditures primarily
related to our continued expansion of information technology hardware, and to a
lesser extent certain office space improvements. In June 2001, we also invested
$6.0 million in Adexa concurrently with the termination of our merger agreement
that had been signed in February 2001. Net cash used in investing activities in
2002 was primarily due to 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. Net cash provided by investing activities in 2003 was primarily due to
maturities of marketable investments, partially offset by purchases of
marketable investments in the normal course of our treasury management
activities. The net cash inflow from this activity was $45.3 million and $6.6
million in 2001 and 2003, respectively, while our net cash outflow from
treasury activities in 2002 was $17.6 million. We expect capital expenditures
to increase in 2004 primarily due to expenditures for our data center migration
project.

Net cash provided by financing activities totaled $17.9 million in 2001,
$17.3 million in 2002 and $8.7 million in 2003. The positive financing cash
flows in all years primarily reflect the net proceeds from the issuance of
stock (including issuance of stock under the employee stock purchase plan, the
exercise of stock options and an equity investment of $3.0 million by
Mitsubishi Corporation in 2001). Cash provided by financing activities in 2001,
2002 and 2003 includes $10.3 million, $12.2 million and $12.2 million,
respectively, received under our service contract with Visteon. We have
determined, based on a review by the SEC in 2001, that we are required to
classify these receipts as payment for the warrant that we granted to Visteon
in April 2000. Net cash provided by financing activities in 2003 was partially
offset by payments to acquire treasury stock in the amount of $6.4 million.

In November 2000, we entered into a one-year revolving credit facility
with a maximum principal amount of $25.0 million. In October 2001, we amended
our bank credit facility to consist of a revolving credit facility with a
maximum principal amount of $20.0 million and a $4.0 million term loan to be
paid in 36 monthly installments, $3.7 million of which was used to retire
borrowings under the old revolving credit facility. Borrowings under the
revolving credit facility and the term loan bear interest at the lenders prime
rate and prime rate +0.50%, respectively. In October 2002 and December 2002, we
entered into a fourth and fifth amendment, respectively, which extended the
expiration date of the revolving credit facility through December 2002 and
February 2003, respectively. In February 2003, we entered into the sixth
amendment, 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. 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. As of December 31, 2003,
$722,000 was outstanding under the term loan and the interest rate was 4.5%. At
December 31, 2003, $13.6 million was available under the revolving credit
facility based on eligible accounts receivable.

Our current bank credit facility contains restrictive covenants, including
a limitation on incurring additional indebtedness and paying dividends. Our
bank credit facility also includes financial covenants as to maximum capital
expenditures, minimum tangible net worth, minimum earnings and minimum quick
ratio. We have pledged substantially all of our tangible assets as collateral
for the current credit facility. As of December 31, 2003, we are in compliance
with all covenants.

We will continue to invest in the growth of our business. In Q1 and Q2
2004, we anticipate negative net cash flows as a result of the $16.3 million
cash acquisition of Covisint in January 2004, the timing of our annual
incentive-based compensation payments, capital expenditures related to our data
center migration project and operating losses in the first half of 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
December 31, 2003, our marketable investment allocation represents 25% of total
cash and investments, compared to 30% at December 31, 2002. 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 December 31, 2003, we had purchased
and retired 1,298,500

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shares or 3% of outstanding common shares as of December 31, 2002 at a
weighted average share price of $4.93.

In September 2003, an arbitrator in Portugal ruled in our favor in
proceedings against a former Brazilian 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.

Our contractual obligations and commercial commitments as of December 31,
2003 are as follows (in thousands):

|                                          |  |                       |        |                  |  |           |       |           |  |               |        |  |  |   |        |  |  |   |       | 
|----------------------------------------- |  | --------------------- | ------ | ---------------- |  | --------- | ----- | --------- |  | ------------- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                          |  | Payment Due by Period
|                                          |  |                      
|Contractual Cash Obligations              |  | Total                 |        | Less than 1 year |  | 1-3 years |       | 4-5 years |  | After 5 years
|                                          |  |                       |        |                  |  |           |       |           |  |              
|Long-term debt, including current
portion |  | $                     | 1,160  |                  |  | $         | 818   |           |  | $             | 306    |  |  | $ | 36     |  |  | $ |      | 
|Purchase obligations                      |  |                       | 707    |                  |  |           | 466   |           |  |               | 241    |  |  |   |       |  |  |   |      | 
|Operating leases                          |  |                       | 35,682 |                  |  |           | 6,741 |           |  |               | 16,271 |  |  |   | 10,445 |  |  |   | 2,225 | 
|                                          |  |                       |        |                  |  |           |       |           |  |               |        |  |  |   |        |  |  |   |       | 
|Total contractual cash obligations        |  | $                     | 37,549 |                  |  | $         | 8,025 |           |  | $             | 16,818 |  |  | $ | 10,481 |  |  | $ | 2,225 | 
|                                          |  |                       |        |                  |  |           |       |           |  |               |        |  |  |   |        |  |  |   |       | 

|                             |  |           |     |                                            |  |           |     |           |  |              |   |  |  |  |   |  |  |  |   | 
|---------------------------- |  | --------- | --- | ------------------------------------------ |  | --------- | --- | --------- |  | ------------ | - |  |  |  | - |  |  |  | - | 
|                             |  | Total     |     | Amount of Commitment Expiration per Period
|                             |  | Amounts   |     |                                           
|Other Commercial Commitments |  | Committed |     | Less than 1 year                           |  | 1-3 years |     | 4-5 years |  | Over 5 years
|                             |  |           |     |                                            |  |           |     |           |  |             
|Standby letters of credit    |  | $         | 836 |                                            |  | $         | 836 |           |  |              |  |  |  |  |  |  |  |  |  | 

Purchase obligations include purchase orders for goods and services
purchased in the normal course of business.

Income Taxes

The provision for income taxes consisted of foreign taxes of $782,000,
$712,000 and $1.2 million in 2001, 2002 and 2003, respectively. There has been
no provision for U.S. federal or state income taxes as we have incurred a net
taxable loss in each of these periods. We recorded foreign income tax
provisions relating to taxes withheld from customer payments and remitted to
foreign taxing jurisdictions on our behalf, as well as income taxes generated
in certain foreign jurisdictions.

As of December 31, 2003, we had net operating loss carryforwards for
federal and state income tax purposes of approximately $146.2 million that will
expire beginning in years 2010 and 2005, respectively.

In addition, we had federal tax credit carryforwards of approximately $4.7
million, which expire beginning in 2010.

Utilization of our net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations imposed by Internal Revenue Code Section 382 and similar state
provisions. Such an annual limitation could result in the expiration of the net
operating loss and tax credit carryforwards before utilization.

Earnings per Share

Under the provisions of SFAS No. 128, Earnings per Share, basic earnings
per share is computed by dividing the net (loss) income for the period by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing the net (loss) income for the period
by the weighted average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares are comprised
of the weighted average outstanding stock options and warrants during each
respective period, as determined by the treasury stock method. In 2001, 2002,
and 2003, potentially dilutive common shares of 4.9 million, 3.1 million and
3.1 million, respectively, were excluded from earnings per share because of our
net loss position.

Recently Issued Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidation of Financial Statements, addresses
consolidation by business enterprises of variable interest entities (VIE)
that either: (1) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (2) the equity investors lack an essential characteristic of a
controlling interest. This interpretation applies to all special-purpose
entities no later than the end of the first reporting period ending after
December 15, 2003 and to all VIEs no later than the end of the first reporting
period ending after March 15, 2004. As of December 31, 2003, we do not have
any entities that require disclosure or new consolidation as a result of
adopting the provision of FIN 46.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

The majority of our revenues recognized to date have been denominated in
United States dollars and are primarily from customers headquartered in the
United States. We have several locations in Europe, Asia, Australia and South
America. In the future, a larger portion of the revenues we derive from
international operations may be denominated in foreign currencies. We incur
costs for our international offices in the local currency of those offices for
staffing, rent, telecommunications and other services. As a result, our
operating results are subject to fluctuations based upon changes in the
exchange rates of those currencies in relation to the United States dollar.
Furthermore, to the extent that we engage in international sales denominated in
United States dollars, an increase in the value of the United States dollar
relative to foreign currencies could make our services less competitive in
international markets.

We believe that a significant risk related to foreign currency is cash
flow risk. In 2003, the majority of our foreign currency denominated cash flows
relate to funding the operations of our Belgian, United Kingdom and Singapore
subsidiaries. While the Singapore dollar relative to the United States dollar
did not fluctuate materially during 2003, the Euro and Great British Pound
strengthened 21% and 11%, respectively, versus the United States dollar from
January 1, 2003 to December 31, 2003. Although we anticipate our foreign
currency exposure related to the Euro to be reduced in 2004 compared to 2003 as
a result of the European Restructuring Plan, we may experience foreign currency
risk that could impact our earnings as our initial 2004 plan did not
contemplate such a continued material change in foreign currency rates. We have
and will continue to monitor our exposure to currency fluctuations, and when
appropriate, we will continue to use financial hedging techniques to minimize
the effect of these fluctuations in the future.

The following table provides information about our foreign exchange
forward contracts outstanding as of December 31, 2003 (in thousands):

|                        |  |                     |   |                      |  |                       |  |                       |       |  |  |   |     |  |  | 
|----------------------- |  | ------------------- | - | -------------------- |  | --------------------- |  | --------------------- | ----- |  |  | - | --- |  |  | 
|                        |  | Number of Contracts |   | Remaining Maturities |  | Contract Value (USD)  |  | Unrealized Gain (USD)
|                        |  |                     |   |                      |  |                       |  |                      
|European currency units |  |                     | 9 |                      |  | One  to four months   |  | $                     | 3,225 |  |  | $ | 233 | 
|Singapore dollars       |  |                     | 2 |                      |  | One to two months     |  | $                     | 813   |  |  | $ | 11  | 
|Australian dollars      |  |                     | 2 |                      |  | One to four months    |  | $                     | 544   |  |  | $ | 55  | 
|Japanese yen            |  |                     | 3 |                      |  | One to two months     |  | $                     | 370   |  |  | $ | 22  | 
|Brazilian real          |  |                     | 1 |                      |  | Less than four months |  | $                     | 163   |  |  | $ | 3   | 

The unrealized gain represents the difference between the contract value
and the market value of the contract based on market rates at December 31,
2003. A hypothetical 10% change in applicable December 31, 2003 forward rates
would result in a pretax gain or loss of approximately $575,000 related to
these open positions. We cannot assure you that exchange rate fluctuations will
not harm our business in the future.

Interest Rate Risk

Our interest income is sensitive to changes in the general level of United
States interest rates, particularly because most of our investments are in
short-term instruments. At December 31, 2003, our cash and marketable
investments were $136.7 million and our average rate of return was 1.6%. A 10%
hypothetical change in this average rate would increase or decrease our
investment income by approximately $200,000. Based on the current market
environment, we anticipate our rate of return in 2004 to approximate 1% to 3%.

Borrowings under our existing revolving credit facility and term loan are
also interest rate sensitive, because the applicable rate varies with changes
in the prime rate of lending. We had $2.8 million and $1.2 million of debt
outstanding at December 31, 2002 and 2003, respectively. Average effective
interest rates were 6.6% in 2002 and 5.2% in 2003. A hypothetical change of 10%
in our effective interest rate from year end 2003 levels would increase or
decrease interest expense by approximately $10,000. We cannot assure you that
interest rate fluctuations will not harm our business in the future.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

|                                                                                                                  |  |  |    | 
|----------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Auditors                                                                                    |  |  | 34 | 
|Consolidated Balance Sheets as of December 31, 2003 and
2002                                                      |  |  | 35 | 
|Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2003           |  |  | 36 | 
|Consolidated Statements of Stockholders Equity for each of
the three years in the period ended December 31, 2003 |  |  | 37 | 
|Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003           |  |  | 38 | 
|Notes to Consolidated Financial Statements                                                                        |  |  | 39 | 

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
of FreeMarkets, Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders equity and cash
flows present fairly, in all material respects, the financial position of
FreeMarkets, Inc. and Subsidiaries (the Company) at December 31, 2003 and 2002
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in note 6 to the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets. Accordingly, the Company changed its method of
accounting for goodwill in 2002.

/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
February 6, 2004

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FreeMarkets, Inc.

Consolidated Balance Sheets
(in thousands)

|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |          |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- | ---- | ------ | -------- | ------- | 
|                                     |                                                                                                                                                         |                                            |        | December 31,
|                                     |                                                                                                                                                         |                                            |        |             
|                                     |                                                                                                                                                         |                                            |        | 2003         |         | 2002
|                                     |                                                                                                                                                         |                                            |        |              |         |     
|Assets                               |                                                                                                                                                         |                                            |        |              |         |      |        |         
|Current assets:                      |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     | Cash and cash equivalents                                                                                                                               |                                            | $      | 102,935      |         |      | $      | 94,593   |        
|                                     | Short-term marketable investments                                                                                                                       |                                            |        | 8,663        |         |      |        | 25,323   |        
|                                     | Accounts receivable, net of allowance for doubtful
accounts of $2,120 and $1,915 as of December 31, 2003
and 2002, respectively                         |                                            |        | 25,039       |         |      |        | 25,673   |        
|                                     | Other current assets                                                                                                                                    |                                            |        | 6,399        |         |      |        | 8,457    |        
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     |                                                                                                                                                         | Total current assets                       |        |              | 143,036 |      |        |          | 154,046 | 
|Long-term marketable investments     |                                                                                                                                                         |                                            | 25,076 |              |         |      | 15,107 |         
|Property and equipment, net          |                                                                                                                                                         |                                            | 10,571 |              |         |      | 20,159 |         
|Goodwill and other assets            |                                                                                                                                                         |                                            | 4,466  |              |         |      | 4,355  |         
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     |                                                                                                                                                         | Total assets                               |        | $            | 183,149 |      |        | $        | 193,667 | 
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |          |        
|Liabilities and Stockholders Equity |                                                                                                                                                         |                                            |        |              |         |      |        |         
|Current liabilities:                 |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     | Accounts payable                                                                                                                                        |                                            | $      | 4,757        |         |      | $      | 4,063    |        
|                                     | Accrued incentive compensation                                                                                                                          |                                            |        | 6,915        |         |      |        | 7,536    |        
|                                     | Accrued restructuring charges                                                                                                                           |                                            |        | 2,676        |         |      |        | 119      |        
|                                     | Other current liabilities                                                                                                                               |                                            |        | 19,020       |         |      |        | 21,608   |        
|                                     | Current portion of long-term debt                                                                                                                       |                                            |        | 818          |         |      |        | 1,502    |        
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     |                                                                                                                                                         | Total current liabilities                  |        |              | 34,186  |      |        |          | 34,828  | 
|Long-term restructuring charges      |                                                                                                                                                         |                                            | 4,404  |              |         |      |       |         
|Long-term debt                       |                                                                                                                                                         |                                            | 342    |              |         |      | 1,328  |         
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     |                                                                                                                                                         | Total liabilities                          |        |              | 38,932  |      |        |          | 36,156  | 
|Commitments and contingencies        |                                                                                                                                                         |                                            |        |              |         |      |        |         
|Stockholders equity:                |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     | Preferred stock, $.01 par value, 5,000 shares authorized;
zero shares issued and outstanding as of December 31,
2003 and 2002                           |                                            |        |             |         |      |        |         |        
|                                     | Common stock, $.01 par value, 500,000 shares authorized;
42,337 and 42,376 shares issued and outstanding as of
December 31, 2003 and 2002, respectively |                                            |        | 423          |         |      |        | 424      |        
|                                     | Additional capital                                                                                                                                      |                                            |        | 592,343      |         |      |        | 575,043  |        
|                                     | Unearned stock-based compensation                                                                                                                       |                                            |        | (24          | )       |      |        | (104     | )      
|                                     | Stock purchase warrants                                                                                                                                 |                                            |        | 76,388       |         |      |        | 76,388   |        
|                                     | Accumulated other comprehensive income (loss)                                                                                                           |                                            |        | 220          |         |      |        | (1       | )      
|                                     | Accumulated deficit                                                                                                                                     |                                            |        | (525,133     | )       |      |        | (494,239 | )      
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     |                                                                                                                                                         | Total stockholders equity                 |        |              | 144,217 |      |        |          | 157,511 | 
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |         
|                                     |                                                                                                                                                         | Total liabilities and stockholders equity |        | $            | 183,149 |      |        | $        | 193,667 | 
|                                     |                                                                                                                                                         |                                            |        |              |         |      |        |          |        

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

31



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FreeMarkets, Inc.

Consolidated Statements of Operations
(in thousands, except per share amounts)

|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |         |          |  
|--------------------------------------------------- | ------------------------------------ | ------------------------------------------ | ------- | ----------------------- | ------- | ---- | ------- | ------ | ------- | - | ------- | ------- | -------- | -
|                                                    |                                      |                                            |         | Year Ended December 31,
|                                                    |                                      |                                            |         |                        
|                                                    |                                      |                                            |         | 2003                    |         | 2002 |         | 2001  
|                                                    |                                      |                                            |         |                         |         |      |         |       
|Revenues                                            |                                      | $                                          | 138,716 |                         |         | $    | 170,441 |        |         | $ | 155,342 |        
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|Operating costs and expenses:                       |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    | Cost of revenues                     |                                            |         | 69,651                  |         |      |         | 76,129 |         |   |         | 78,582  |         
|                                                    | Research and development             |                                            |         | 24,551                  |         |      |         | 27,019 |         |   |         | 20,067  |         
|                                                    | Sales and marketing                  |                                            |         | 35,584                  |         |      |         | 45,612 |         |   |         | 51,304  |         
|                                                    | General and administrative           |                                            |         | 21,425                  |         |      |         | 23,674 |         |   |         | 32,086  |         
|                                                    | Stock compensation and warrant costs |                                            |         | 6,783                   |         |      |         | 7,998  |         |   |         | 8,569   |         
|                                                    | Investment write-down                |                                            |         |                        |         |      |         | 5,111  |         |   |         |        |         
|                                                    | Restructuring charges                |                                            |         | 14,161                  |         |      |         | (303   | )       |   |         | 6,432   |         
|                                                    | Terminated merger-related costs      |                                            |         |                        |         |      |         |       |         |   |         | 3,385   |         
|                                                    | Goodwill amortization and impairment |                                            |         |                        |         |      |         |       |         |   |         | 252,031 |         
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|Total operating costs and expenses                  |                                      |                                            | 172,155 |                         |         |      | 185,240 |        |         |   | 452,456 |        
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    |                                      | Operating loss                             |         |                         | (33,439 | )    |         |        | (14,799 | ) |         |         | (297,114 | )
|Interest and other income, net                      |                                      |                                            | 3,733   |                         |         |      | 3,243   |        |         |   | 2,665   |        
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    |                                      | Loss before taxes and change in accounting |         |                         | (29,706 | )    |         |        | (11,556 | ) |         |         | (294,449 | )
|Provision for income taxes                          |                                      |                                            | 1,188   |                         |         |      | 712     |        |         |   | 782     |        
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    |                                      | Loss before change in accounting           |         |                         | (30,894 | )    |         |        | (12,268 | ) |         |         | (295,231 | )
|Cumulative effect of accounting change for goodwill |                                      |                                            |        |                         |         |      | (5,327  | )      |         |   |        |        
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    |                                      | Net loss                                   |         | $                       | (30,894 | )    |         | $      | (17,595 | ) |         | $       | (295,231 | )
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|Earnings per share:                                 |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    |                                      | Basic and diluted before accounting change |         | $                       | (0.74   | )    |         | $      | (0.30   | ) |         | $       | (7.48    | )
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    |                                      | Basic and diluted after accounting change  |         | $                       | (0.74   | )    |         | $      | (0.42   | ) |         | $       | (7.48    | )
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|Weighted average common shares outstanding:         |                                      |                                            |         |                         |         |      |         |        |         |   |         |        
|                                                    |                                      | Basic and diluted                          |         |                         | 42,002  |      |         |        | 41,553  |   |         |         | 39,492   |  
|                                                    |                                      |                                            |         |                         |         |      |         |        |         |   |         |        

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

32



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##### Table of Contents



FreeMarkets, Inc.

Consolidated Statements of Stockholders Equity
(in thousands)

AccumulatedUnearned
    
    Stock
    
    OtherPreferred
    
    Common
    
    Additional
    
    Stock-based
    
    Purchase
    
    Comprehensive
    
    Accumulated
    
    TreasuryStock
    
    Stock
    
    Capital
    
    Compensation
    
    Warrants
    
    Income (Loss)
    
    Deficit
    
    Stock
    
    TotalBalance at December 31, 2000
    
    $
    
    
    
    $
    388
    
    
    $
    503,065
    
    
    $
    (556
    )
    
    $
    95,484
    
    
    $
    (171
    )
    
    $
    (181,413
    )
    
    $
    
    
    
    $
    416,797Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (295,231
    )
    
    
    
    
    
    
    (295,231
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    540
    
    
    
    
    
    
    
    
    
    
    
    540Change in unrealized gain
(loss) on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    182Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (294,509
    )Stock purchase warrants
exercised
    
    
    
    
    
    
    3
    
    
    
    19,096
    
    
    
    
    
    
    
    (19,096
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Options exercised
    
    
    
    
    
    
    12
    
    
    
    2,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,590Unearned stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    421
    
    
    
    302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    723Amortization of stock
purchase warrants, including
$11,250 of customer fees
    
    
    
    
    
    
    
    
    
    
    19,097
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,097Common stock issuance under
Employee Stock Purchase
Plan
    
    
    
    
    
    
    2
    
    
    
    1,942
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,944Common stock issuance to
Mitsubishi
    
    
    
    
    
    
    2
    
    
    
    2,998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Balance at December 31, 2001
    
    
    
    
    
    
    407
    
    
    
    549,197
    
    
    
    (254
    )
    
    
    76,388
    
    
    
    551
    
    
    
    (476,644
    )
    
    
    
    
    
    
    149,645Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,595
    )
    
    
    
    
    
    
    (17,595
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403
    )
    
    
    
    
    
    
    
    
    
    
    (403
    )Change in unrealized gain
(loss) on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    (149
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,147
    )Options exercised
    
    
    
    
    
    
    13
    
    
    
    3,617
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,630Unearned stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150Amortization of stock
purchase warrants, including
$11,250 of customer fees
    
    
    
    
    
    
    
    
    
    
    19,097
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,097Common stock issuance under
Employee Stock Purchase
Plan
    
    
    
    
    
    
    4
    
    
    
    3,132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,136Balance at December 31, 2002
    
    
    
    
    
    
    424
    
    
    
    575,043
    
    
    
    (104
    )
    
    
    76,388
    
    
    
    (1
    )
    
    $
    (494,239
    )
    
    
    
    
    
    
    157,511Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,894
    )
    
    
    
    
    
    
    (30,894
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    350Change in unrealized gain
(loss) on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )
    
    
    
    
    
    
    
    
    
    
    (129
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,673
    )Options exercised
    
    
    
    
    
    
    8
    
    
    
    2,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,485Unearned stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Amortization of stock
purchase warrants, including
$12,393 of customer fees
    
    
    
    
    
    
    
    
    
    
    19,096
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,096Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,398
    )
    
    
    (6,398
    )Retirement of treasury stock
    
    
    
    
    
    
    (13
    )
    
    
    (6,385
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,398
    
    
    
    Common stock issuance under
Employee Stock Purchase
Plan
    
    
    
    
    
    
    4
    
    
    
    2,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,116Balance at December 31, 2003
    
    $
    
    
    
    $
    423
    
    
    $
    592,343
    
    
    $
    (24
    )
    
    $
    76,388
    
    
    $
    220
    
    
    $
    (525,133
    )
    
    $
    
    
    
    $
    144,217




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

33



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##### Table of Contents



FreeMarkets, Inc.

Consolidated Statements of Cash Flows
(in thousands)

|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |         |         |  
|------------------------------------- | ------------------------------------------------------------------------ | -------------------------------------------------------------- | --------------------------------------------------- | ------- | ----------------------- | ------ | ---- | ------- | ------- | ------- | - | -------- | ------- | ------- | -
|                                      |                                                                          |                                                                |                                                     |         | Year Ended December 31,
|                                      |                                                                          |                                                                |                                                     |         |                        
|                                      |                                                                          |                                                                |                                                     |         | 2003                    |        | 2002 |         | 2001   
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |        
|Cash flows from operating activities: |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      | Net loss                                                                 |                                                                | $                                                   | (30,894 | )                       |        | $    | (17,595 | )       |         | $ | (295,231 | )      
|                                      | Adjustments to reconcile net loss to net cash from
operating activities: |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      |                                                                          | Depreciation and amortization                                  |                                                     |         | 12,756                  |        |      |         | 19,394  |         |   |          | 18,344  |        
|                                      |                                                                          | Provision for bad debts                                        |                                                     |         | 1,501                   |        |      |         | 1,555   |         |   |          | 3,123   |        
|                                      |                                                                          | Stock compensation and warrant costs                           |                                                     |         | 6,783                   |        |      |         | 7,998   |         |   |          | 8,569   |        
|                                      |                                                                          | Investment write-down                                          |                                                     |         |                        |        |      |         | 5,111   |         |   |          |        |        
|                                      |                                                                          | Cumulative effect of accounting change for goodwill            |                                                     |         |                        |        |      |         | 5,327   |         |   |          |        |        
|                                      |                                                                          | Non-cash restructuring costs                                   |                                                     |         | 1,561                   |        |      |         | (303    | )       |   |          | 2,179   |        
|                                      |                                                                          | Goodwill amortization and impairment                           |                                                     |         |                        |        |      |         |        |         |   |          | 252,031 |        
|                                      |                                                                          | Loss on disposal of property and equipment                     |                                                     |         |                        |        |      |         |        |         |   |          | 1,138   |        
|                                      | Cash provided by (used in) changes in:                                   |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      |                                                                          | Accounts receivable                                            |                                                     |         | (662                    | )      |      |         | 4,180   |         |   |          | (6,670  | )      
|                                      |                                                                          | Other assets                                                   |                                                     |         | 1,903                   |        |      |         | (3,360  | )       |   |          | (165    | )      
|                                      |                                                                          | Accounts payable                                               |                                                     |         | 694                     |        |      |         | (618    | )       |   |          | (543    | )      
|                                      |                                                                          | Other liabilities                                              |                                                     |         | 4,102                   |        |      |         | (405    | )       |   |          | 2,476   |        
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      |                                                                          |                                                                | Net cash (used in) provided by operating
activities |         |                         | (2,256 | )    |         |         | 21,284  |   |          |         | (14,749 | )
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      | Cash flows from investing activities:                                    |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      |                                                                          | Purchases of marketable investments                            |                                                     |         | (46,853                 | )      |      |         | (29,648 | )       |   |          | (57,196 | )      
|                                      |                                                                          | Maturities of marketable investments                           |                                                     |         | 53,415                  |        |      |         | 12,075  |         |   |          | 102,528 |        
|                                      |                                                                          | Proceeds from disposal of property and equipment               |                                                     |         |                        |        |      |         |        |         |   |          | 2,544   |        
|                                      |                                                                          | Investment in Adexa, Inc.                                      |                                                     |         |                        |        |      |         |        |         |   |          | (6,000  | )      
|                                      |                                                                          | Capital expenditures, net                                      |                                                     |         | (4,685                  | )      |      |         | (6,946  | )       |   |          | (17,307 | )      
|                                      |                                                                          | Patent and trademark costs                                     |                                                     |         |                        |        |      |         |        |         |   |          | (186    | )      
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      |                                                                          |                                                                | Net cash provided by (used in) investing
activities |         |                         | 1,877  |      |         |         | (24,519 | ) |          |         | 24,383  |  
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      | Cash flows from financing activities:                                    |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      |                                                                          | Proceeds from debt                                             |                                                     |         | 500                     |        |      |         |        |         |   |          | 4,000   |        
|                                      |                                                                          | Repayment of debt                                              |                                                     |         | (2,170                  | )      |      |         | (1,608  | )       |   |          | (3,993  | )      
|                                      |                                                                          | Proceeds from issuance of common stock, net                    |                                                     |         | 2,116                   |        |      |         | 3,136   |         |   |          | 4,944   |        
|                                      |                                                                          | Proceeds from customer fees applied to warrant                 |                                                     |         | 12,188                  |        |      |         | 12,188  |         |   |          | 10,313  |        
|                                      |                                                                          | Payments to acquire treasury stock                             |                                                     |         | (6,398                  | )      |      |         |        |         |   |          |        |        
|                                      |                                                                          | Options and warrants exercised                                 |                                                     |         | 2,485                   |        |      |         | 3,630   |         |   |          | 2,593   |        
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      |                                                                          |                                                                | Net cash provided by financing activities           |         |                         | 8,721  |      |         |         | 17,346  |   |          |         | 17,857  |  
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      | Net change in cash and cash equivalents                                  |                                                                |                                                     | 8,342   |                         |        |      | 14,111  |         |         |   | 27,491   |        
|                                      | Cash and cash equivalents at beginning of period                         |                                                                |                                                     | 94,593  |                         |        |      | 80,482  |         |         |   | 52,991   |        
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |         
|                                      | Cash and cash equivalents at end of period                               |                                                                | $                                                   | 102,935 |                         |        | $    | 94,593  |         |         | $ | 80,482   |        
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      | Supplemental disclosure:                                                 |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      |                                                                          | Cash paid for interest                                         |                                                     | $       | 112                     |        |      | $       | 235     |         |   | $        | 347     |        
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      |                                                                          | Cash paid for income taxes                                     |                                                     | $       | 1,276                   |        |      | $       | 462     |         |   | $        | 362     |        
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      | Supplemental non-cash disclosures:                                       |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        
|                                      |                                                                          | Amounts due from customer characterized as payment for
warrant |                                                     | $       | 3,016                   |        |      | $       | 2,813   |         |   | $        | 3,750   |        
|                                      |                                                                          |                                                                |                                                     |         |                         |        |      |         |         |         |   |          |        

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

34



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##### Table of Contents



FreeMarkets, Inc.

Notes to Consolidated Financial Statements

Note 1. Description of Business

FreeMarkets, Inc. and Subsidiaries (the Company) provides software,
services and solutions to help companies improve their sourcing and supply
management processes and enhance the capabilities of their supply management
organizations. These solutions are ultimately designed to help companies lower
costs and reduce their supply risk. The Companys customers are buyers of
industrial parts, raw materials, commodities and services. As of December 31,
2003, the Company serves its customers from 17 locations in 13 countries on
five continents through operations centers in Pittsburgh and Singapore.

Note 2. Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The Company has three subsidiaries in Europe
and seven subsidiaries in Asia and Australia and one in South America. There
are also five in North America, three of which are Delaware holding companies.
All material intercompany accounts and transactions have been eliminated.

Cash and cash equivalents

The Company considers all unrestricted, highly liquid investments with
maturities of three months or less at the time of purchase to be cash
equivalents.

Allowance for doubtful accounts

At December 31, 2003 and 2002, the allowance for doubtful accounts was
$2.1 million and $1.9 million, respectively. The Company evaluates the
collectibility of accounts receivable based on a combination of factors. In
cases where the Company is aware of circumstances that may impair a customers
ability to meet its financial obligations, it records a specific allowance
against amounts due. For all customers, the Company recognizes allowance for
doubtful accounts based on the length of time the receivables are past due, the
current business environment and the Companys historical experience. If the
financial condition of the Companys customers deteriorates or if the economic
conditions worsen, additional allowances may be required in the future.

Marketable investments

As of December 31, 2003 and 2002, marketable investments consisted of
corporate bonds and U.S. government agency notes and bonds. Short-term
investments are marketable securities with maturities of greater than three
months at the time of purchase and less than one year from the balance sheet
date. The Company classifies its investments as available for sale. Such
investments are recorded at fair value based on quoted market prices, with
unrealized gains and losses, which are considered to be temporary, recorded as
accumulated other comprehensive income or loss until realized. Realized gains
and losses are recorded based on the specific identification method.

Foreign currency management

The Company occasionally uses foreign exchange contracts to reduce its net
exposures to foreign currency risks. These risks primarily relate to cash flow
risks associated with funding its Belgian, United Kingdom and Singapore
subsidiaries. The forward foreign exchange contracts require the Company to
exchange foreign currencies for U.S. dollars or vice versa, and generally
mature in six months or less.

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The following table provides information about the Companys foreign
exchange forward contracts outstanding as of December 31, 2003 (in thousands):

|                        |  |                     |   |                      |  |                       |  |                       |       |  |  |   |     |  |  | 
|----------------------- |  | ------------------- | - | -------------------- |  | --------------------- |  | --------------------- | ----- |  |  | - | --- |  |  | 
|                        |  | Number of Contracts |   | Remaining Maturities |  | Contract Value (USD)  |  | Unrealized Gain (USD)
|                        |  |                     |   |                      |  |                       |  |                      
|European currency units |  |                     | 9 |                      |  | One  to four months   |  | $                     | 3,225 |  |  | $ | 233 | 
|Singapore dollars       |  |                     | 2 |                      |  | One to two months     |  | $                     | 813   |  |  | $ | 11  | 
|Australian dollars      |  |                     | 2 |                      |  | One to four months    |  | $                     | 544   |  |  | $ | 55  | 
|Japanese yen            |  |                     | 3 |                      |  | One to two months     |  | $                     | 370   |  |  | $ | 22  | 
|Brazilian real          |  |                     | 1 |                      |  | Less than four months |  | $                     | 163   |  |  | $ | 3   | 

The unrealized gain represents the difference between the contract value
and the market value of the contract based on market rates at December 31,
2003. These contracts resulted in gains in the amount of approximately
$502,000 in 2003 and immaterial gains in 2002 and 2001.

Property and equipment, net

Property and equipment are recorded at cost and depreciated on the
straight-line method over their estimated useful lives. Qualified internally
developed software costs for internal use are capitalized subsequent to both
the preliminary project stage and when management has committed to funding, in
accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. Repairs and
maintenance expenditures, which are not considered improvements and do not
extend the useful life of the property and equipment, are expensed as incurred.
The cost and related accumulated depreciation applicable to property and
equipment no longer in service are eliminated from the accounts and any gain or
loss is included in operations.

Goodwill and other assets, net

The excess of costs over net assets acquired (goodwill) was being
amortized on the straight-line method over its estimated useful life, which was
three years. Effective January 1, 2002, and in accordance with SFAS No.142,
goodwill is no longer amortized. The Company completed its annual test for
impairment in Q1 2003 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. Patents and trademarks are being amortized on the straight-line method
over the shorter of their estimated useful lives or seventeen years. Other
assets also include an investment in Adexa, Inc. (Adexa), which is stated at
cost, reduced for other-than-temporary declines in fair value.

Impairment of long-lived assets

The carrying values of long-lived assets, which include property and
equipment and other assets, are evaluated for impairment whenever events or
changes in circumstances indicate the carrying amount may not be recoverable.
An impairment would be determined based on a comparison of future undiscounted
cash flows to the underlying assets. If required, adjustments would be measured
based on discounted cash flows.

Legal contingencies

As discussed in Note 9, the Company is currently involved in various
claims and legal proceedings. Periodically, the Company reviews the status of
each significant matter and assesses its potential financial exposure. If the
potential loss from any claim or legal proceeding is considered probable and
the amount can be estimated, the Company accrues a liability for the estimated
loss. Because of uncertainties related to these matters, accruals are based on
the best information available at the time.

Concentrations of credit risk

The majority of cash and cash equivalents is maintained with several major
financial institutions in the United States. Deposits with these banks exceed
the amount of insurance provided on such deposits; however, these deposits
typically may be redeemed upon demand and therefore, bear minimal risk.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of marketable investments and
trade receivables. Investment policies have been implemented that limit the
concentration of investments, as well as affix minimum standards for credit
quality. The risk of trade receivables is mitigated by credit evaluations we
perform on our customers. However, as of December 31, 2003 and 2002, amounts
due from one customer represented 12% and 11%, respectively, of

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total gross accounts receivable.

Revenue recognition

The Company recognizes revenue from the fixed monthly fees for its
FullSource offering ratably as the access to those services are provided over
the related contract periods. In the case of contracts with performance
incentive payments based on market volume and/or savings generated, as defined
in the respective contracts, revenue is recognized as those thresholds are
achieved. The Company recognizes fees for providing access to its QS
application ratably as that access is provided. Revenue excludes fees earned
under a FullSource service contract with Visteon Corporation (Visteon).

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

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.

Revenue in excess of billings is recorded as unbilled receivables and is
included in trade accounts receivable. Billings in excess of revenue are
recorded as deferred revenue until revenue recognition criteria are met.

Related party

United Technologies invested $20.0 million in the Company in September
1999. This investment represented greater than 5% of the Companys outstanding
common stock as of December 31, 2001. Revenues from United Technologies were 5%
of revenues in 2001. United Technologies no longer holds greater than 5% of the
Companys outstanding common stock.

Cost of revenues

Cost of revenues consists primarily of the expenses related to staffing
and operation of the Companys global sourcing service organization and market
operations centers. Staffing costs include a proportional allocation of
overhead costs based on headcount, such as rent and depreciation.

Research and development costs

Research and development costs are expensed as incurred, and include costs
to develop, enhance and manage the Companys proprietary software technology.
The fair value of purchased in-process research and development is estimated by
assessing the percentage-of-completion of the research project, costs required
to complete the project, and expected future revenues from the related
products, and discounting such amounts using an appropriate risk-weighted
discount rate. Amounts allocated in an acquisition to in-process research and
development are expensed in the period in which the acquisition is consummated.

Advertising costs

Advertising costs are expensed at the time the advertisement is first
aired or the promotion is held, and amounted to $5.7 million in 2003, $9.2
million in 2002 and $10.9 million in 2001.

Start-up costs

Start-up costs are expensed as incurred, and include costs to establish
new locations, operations or subsidiaries.

Stock compensation

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At December 31, 2003, the Company has four stock-based employee
compensation plans, which are described more fully in Note 12. SFAS No. 123,
Accounting for Stock-Based Compensation, gives companies the option to adopt
the fair value method for expense recognition of employee stock options or to
continue to account for employee stock options using the intrinsic value
method, as outlined under Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has elected to continue
to apply the intrinsic value method to account for employee stock options and
discloses the pro forma effect as if the fair value method had been applied in
Note 12. The Company records unearned stock compensation for stock options
granted at exercise prices less than fair value. Such unearned stock
compensation is amortized on an accelerated basis over the vesting period of
each individual award in accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 28. The following table illustrates the effect on
net loss and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation:

|                                                                                                        |                   |             |         |                                          |       |      |         |      |       |   |          |   |       |  
|------------------------------------------------------------------------------------------------------- | ----------------- | ----------- | ------- | ---------------------------------------- | ----- | ---- | ------- | ---- | ----- | - | -------- | - | ----- | -
|                                                                                                        |                   |             |         | Year Ended December 31,                 
|                                                                                                        |                   |             |         |                                         
|                                                                                                        |                   |             |         | 2003                                     |       | 2002 |         | 2001
|                                                                                                        |                   |             |         |                                          |       |      |         |     
|                                                                                                        |                   |             |         | (in thousands, except per share amounts)
|Net loss, as reported                                                                                   |                   | $           | (30,894 | )                                        |       | $    | (17,595 | )    |       | $ | (295,231 | )
|Add: Stock-based employee compensation expense included in
reported net income                          |                   |             | 80      |                                          |       |      | 150     |      |       |   | 722      |  
|Less: Total stock-based employee compensation expense
determined under fair value method for all awards |                   |             | (38,235 | )                                        |       |      | (53,134 | )    |       |   | (89,354  | )
|                                                                                                        |                   |             |         |                                          |       |      |         |      |       |   |          |  
|Pro forma net loss                                                                                      |                   | $           | (69,049 | )                                        |       | $    | (70,579 | )    |       | $ | (383,863 | )
|                                                                                                        |                   |             |         |                                          |       |      |         |      |       |   |          |  
|Earnings per share:                                                                                     |                   |             |         |                                          |       |      |         |      |       |   |          |  
|                                                                                                        | Basic and diluted |             |         |                                          |       |      |         |      |       |   |          |   |      
|                                                                                                        |                   | As reported |         | $                                        | (0.74 | )    |         | $    | (0.42 | ) |          | $ | (7.48 | )
|                                                                                                        |                   |             |         |                                          |       |      |         |      |       |   |          |  
|                                                                                                        |                   | Pro forma   |         | $                                        | (1.64 | )    |         | $    | (1.70 | ) |          | $ | (9.72 | )
|                                                                                                        |                   |             |         |                                          |       |      |         |      |       |   |          |  

The weighted average fair value per option grant to employees was $3.82 in
2003, $10.26 in 2002 and $14.71 in 2001. The fair value of each option grant
was determined using the minimum value method prior to the Companys December
1999 initial public offering (IPO) and using the Black-Scholes pricing model
subsequent to the IPO, with the following assumptions for all grants:

|                                         |  |                         |              |      |  |      |      |   |  |  |     |  
|---------------------------------------- |  | ----------------------- | ------------ | ---- |  | ---- | ---- | - |  |  | --- | -
|                                         |  | Year Ended December 31,
|                                         |  |                        
|                                         |  | 2003                    |              | 2002 |  | 2001
|                                         |  |                         |              |      |  |     
|Weighted average risk-free interest rate |  |                         | 3.0 % - 4.75 | %    |  |      | 4.75 | % |  |  | 5.5 | %
|Expected life (number of years)          |  |                         | 5.9 - 6.5    |      |  |      | 6.2  |   |  |  | 5.0 |  
|Volatility                               |  |                         | 100% - 120   | %    |  |      | 100  | % |  |  | 130 | %

Income taxes

Deferred income taxes are recorded using the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

International operations

The local currency is the functional currency for the Companys operations
outside of the United States. Assets and liabilities are translated using the
exchange rate at the balance sheet date. Revenues, expenses, gains and losses
are translated at the exchange rate on the date those elements are recognized.

Earnings per share

Under the provisions of SFAS No. 128, Earnings per Share, basic earnings
per share is computed by dividing the net (loss) income for the period by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing the net (loss) income for the period
by the weighted average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares consist of
the common shares issuable upon the exercise of stock options and warrants
(using the treasury stock method). Potentially dilutive common shares are
excluded from the calculation if their effect is antidilutive.

In 2003, 2002 and 2001, potentially dilutive common shares of 3.1 million,
3.1 million and 4.9 million, respectively, were excluded because their effect
was antidilutive.

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Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

Segment reporting

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

The Company serves its customers from locations in the United States and
12 foreign countries. Many of the Companys customers are multi-national
companies. Over 90% of the Companys revenues in each of 2003, 2002 and 2001
were derived from customers whose headquarters are located in the United
States. In addition, over 90% of the Companys assets are located in the United
States.

Lease abandonment costs

Lease abandonment costs for abandoned facilities are estimated to
include the impairment of leasehold improvements and remaining lease liabilities,
offset by estimate 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, the
Company reviews these estimates and to the extent that its assumptions change
the ultimate restructuring expenses for these abandoned facilities could vary
from current estimates.

Reclassification

Certain prior year amounts have been reclassified to conform with the
current presentation.

Recent accounting pronouncements

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, primarily EITF No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Application of SFAS No. 146 is required
for restructuring activities initiated after December 31, 2002. SFAS No. 146
requires recognition of the liability for costs associated with an exit or
disposal activity when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost was recognized at the date of the Companys
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. The Company adopted
this standard effective January 1, 2003 and applied the provisions of this
standard to its 2003 restructuring activities.

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

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidation of Financial Statements, addresses
consolidation by business enterprises of variable interest entities (VIE)
that either: (1) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (2) the equity investors lack an essential characteristic of a
controlling interest. This interpretation applies to all special-purpose
entities no later than the end of the first reporting period ending after
December 15, 2003 and to all VIEs no later than the end of the first reporting
period ending after March 15, 2004. As of December 31, 2003, the Company does
not have any entities that require disclosure or new consolidation as a result
of adopting the provision of FIN 46.

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Note 3. Restructuring Charges, Terminated Merger-Related Costs and Goodwill Impairment

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 the first quarter of 2003, in response to the continued economic
slowdown, the Company executed a restructuring plan resulting in the
elimination of 79 positions in its global workforce. 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 the Q1 2003 and Q4 2003, respectively. The Company intends
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 December 31, 2003, $674,000 of
the $4.3 million accrual will be paid in 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.

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 elimination of 74
positions in its European business. The Company recorded a restructuring
charge of $3.2 million in Q3 2003 covering these severance costs and legal
fees. While most of the severance costs have been paid in accordance with
local employment laws, the Company expects to pay the remaining severance
portion of the restructuring accrual of $93,000 in Q1 2004.

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 current real estate market conditions. As of December
31, 2003, all employees to be terminated as a result of the restructuring have
been notified. The Company expects to pay the remaining restructuring accrual
relating to severance and implementation in the amount of $917,000 over the
next few quarters. The accrual for lease costs (net of anticipated sub-lease
proceeds) will be paid over the lease term through August 2006. As of December
31, 2003, $1.0 million of the $1.8 million accrual for lease costs will be paid
in 2004, and is therefore classified as a current liability in the Companys
consolidated balance sheet.

2001 Restructuring Plan

In April 2001, the Company closed its Austin, Texas office, formerly the
headquarters of its iMark subsidiary, and centralized the Companys asset
recovery operations at its corporate headquarters in Pittsburgh, Pennsylvania.
As a result of the closing of the Austin

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office, the Company recorded a $3.1 million restructuring charge covering
the severance costs, lease termination costs and non-cash write-off of assets
related to the Austin office. In June 2001, the Company closed two foreign
offices and terminated certain employees in those and other offices. As a
result, the Company recorded a $3.3 million restructuring charge covering
severance and lease termination costs. All amounts under this restructuring
plan have been paid.

The Company recorded initial restructuring charges in Q2 2001 based on
assumptions and related estimates that it deemed appropriate for the economic
environment that existed at the time. In 2002, the Company re-commenced use of
office space and revised its estimate for employee severance and termination
benefit costs. As a result of these reviews, the Company reversed $303,000 of
the accrual through results of operation.

The following table sets forth an analysis of the restructuring accrual
activity for the years ended December 31, 2003, 2002 and 2001:

|                                 |                                   |   |                         |       |                         |   |               |       |               |   |            |       |       |   |        |       |  |   |        |       |  |   |        |       | 
|-------------------------------- | --------------------------------- | - | ----------------------- | ----- | ----------------------- | - | ------------- | ----- | ------------- | - | ---------- | ----- | ----- | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                 |                                   |   | 2003 Restructuring Plan |       | 2001 Restructuring Plan
|                                 |                                   |   |                         |       |                        
|                                 |                                   |   | Workforce               |       | Facility                |   | European      |       |               |   |            |       |       |   |        |       |  |   |       
|                                 |                                   |   | Reduction               |       | Reduction               |   | Restructuring |       | Severance and |   | Facilities |       |       |   |       
|                                 |                                   |   | Plan                    |       | Plan                    |   | Plan          |       | Benefits      |   | Related    |       | Total
|                                 |                                   |   |                         |       |                         |   |               |       |               |   |            |       |      
|Restructuring charge in 2001:    |                                   |   |                         |       |                         |   |               |       |               |   |            |       |       |   |        |       |  |   |        |       |  |   |        |      
|                                 | Severance and benefits            |   | $                       |      |                         |   | $             |      |               |   | $          |      |       |   | $      | 2,347 |  |   | $      |      |  |   | $      | 2,347 | 
|                                 | Accrued lease costs               |   |                         |      |                         |   |               |      |               |   |            |      |       |   |        |      |  |   |        | 1,719 |  |   |        | 1,719 | 
|                                 | Property and equipment impairment |   |                         |      |                         |   |               |      |               |   |            |      |       |   |        |      |  |   |        | 2,179 |  |   |        | 2,179 | 
|                                 | Implementation costs              |   |                         |      |                         |   |               |      |               |   |            |      |       |   |        |      |  |   |        | 187   |  |   |        | 187   | 
|Cash paid                        |                                   |   |                        |       |                         |   |              |       |               |   |           |       |       |   | (2,164 | )     |  |   | (1,226 | )     |  |   | (3,390 | )    
|Non-cash charges                 |                                   |   |                        |       |                         |   |              |       |               |   |           |       |       |   |       |       |  |   | (2,179 | )     |  |   | (2,179 | )    
|                                 |                                   |   |                         |       |                         |   |               |       |               |   |            |       |       |   |        |       |  |   |        |       |  |   |        |      
|Balance as of December 31, 2001  |                                   |   |                        |       |                         |   |              |       |               |   |           |       |       |   | 183    |       |  |   | 680    |       |  |   | 863    |      
|Cash paid                        |                                   |   |                        |       |                         |   |              |       |               |   |           |       |       |   | (31    | )     |  |   | (410   | )     |  |   | (441   | )    
|Restructuring accrual adjustment |                                   |   |                        |       |                         |   |              |       |               |   |           |       |       |   | (152   | )     |  |   | (151   | )     |  |   | (303   | )    
|                                 |                                   |   |                         |       |                         |   |               |       |               |   |            |       |       |   |        |       |  |   |        |       |  |   |        |      
|Balance as of December 31, 2002  |                                   |   |                        |       |                         |   |              |       |               |   |           |       |       |   |       |       |  |   | 119    |       |  |   | 119    |      
|Restructuring charge in 2003:    |                                   |   |                         |       |                         |   |               |       |               |   |            |       |       |   |        |       |  |   |        |       |  |   |        |      
|                                 | Severance and benefits            |   |                         | 1,754 |                         |   |               |      |               |   |            | 3,979 |       |   |        |      |  |   |        |      |  |   |        | 5,733 | 
|                                 | Accrued lease costs               |   |                         |      |                         |   |               | 4,642 |               |   |            | 1,842 |       |   |        |      |  |   |        |      |  |   |        | 6,484 | 
|                                 | Property and equipment impairment |   |                         |      |                         |   |               | 371   |               |   |            | 1,190 |       |   |        |      |  |   |        |      |  |   |        | 1,561 | 
|                                 | Implementation costs              |   |                         |      |                         |   |               |      |               |   |            | 383   |       |   |        |      |  |   |        |      |  |   |        | 383   | 
|Cash paid                        |                                   |   | (1,754                  | )     |                         |   | (324          | )     |               |   | (3,442     | )     |       |   |       |       |  |   | (119   | )     |  |   | (5,639 | )    
|Non-cash charges                 |                                   |   |                        |       |                         |   | (371          | )     |               |   | (1,190     | )     |       |   |       |       |  |   |       |       |  |   | (1,561 | )    
|                                 |                                   |   |                         |       |                         |   |               |       |               |   |            |       |       |   |        |       |  |   |        |       |  |   |        |      
|Balance as of December 31, 2003  |                                   | $ |                        |       |                         | $ | 4,318         |       |               | $ | 2,762      |       |       | $ |       |       |  | $ |       |       |  | $ | 7,080  |      
|                                 |                                   |   |                         |       |                         |   |               |       |               |   |            |       |       |   |        |       |  |   |        |       |  |   |        |       | 

Goodwill Impairment

Furthermore, the Company re-evaluated its product and technology strategy,
and decided that the Company would no longer use the technology platform or the
market strategy that it acquired with iMark. As a result of this decision to
abandon the technology and strategy acquired with iMark, the Company recorded a
$204.3 million impairment charge in Q2 2001 to fully write-off the remaining
unamortized goodwill balance.

Terminated Merger-Related Costs

In addition, in February 2001, the Company signed a definitive agreement
to acquire Adexa, a provider of software products that enable collaborative
supply chain management and optimization. However, in June 2001, the Company
and Adexa mutually agreed to terminate their proposed merger without payment of
any termination fees. The Company incurred merger-related costs of
approximately $3.4 million related to financial advisor and other professional
fees, which were all expensed in Q2 2001.

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Note 4. Marketable Investments

Marketable investments consisted of the following:

|                                     |  |                   |        |                   |  |             |        |           |  |       |     |            |  |   |        |  |  |   |        |  |  |   |    | 
|------------------------------------ |  | ----------------- | ------ | ----------------- |  | ----------- | ------ | --------- |  | ----- | --- | ---------- |  | - | ------ |  |  | - | ------ |  |  | - | -- | 
|                                     |  | December 31, 2003 |        | December 31, 2002
|                                     |  |                   |        |                  
|                                     |  | Amortized         |        | Fair              |  | Unrealized  |        | Amortized |  | Fair  |     | Unrealized
|                                     |  | Cost              |        | Value             |  | Gain (Loss) |        | Cost      |  | Value |     | Gain      
|                                     |  |                   |        |                   |  |             |        |           |  |       |     |           
|                                     |  | (in thousands)   
|Corporate notes and bonds            |  | $                 | 8,661  |                   |  | $           | 8,663  |           |  | $     | 2   |            |  | $ | 22,234 |  |  | $ | 22,267 |  |  | $ | 33 | 
|US Government Agency notes and bonds |  |                   | 25,159 |                   |  |             | 25,076 |           |  |       | (83 | )          |  |   | 18,148 |  |  |   | 18,163 |  |  |   | 15 | 
|                                     |  |                   |        |                   |  |             |        |           |  |       |     |            |  |   |        |  |  |   |        |  |  |   |    | 
|                                     |  | $                 | 33,820 |                   |  | $           | 33,739 |           |  | $     | (81 | )          |  | $ | 40,382 |  |  | $ | 40,430 |  |  | $ | 48 | 
|                                     |  |                   |        |                   |  |             |        |           |  |       |     |            |  |   |        |  |  |   |        |  |  |   |    | 

As of December 31, 2003, the amortized cost and estimated fair values of
short-term and long-term marketable investments (excluding cash and cash
equivalents) by contractual maturity were as follows (in thousands):

|                    |  |                |        |       |  |      |        | 
|------------------- |  | -------------- | ------ | ----- |  | ---- | ------ | 
|                    |  | Amortized     
|                    |  |               
|                    |  |                |        |       |  | Fair
|                    |  | Cost           |        | Value
|                    |  |                |        |      
|                    |  | (in thousands)
|Less than one year  |  | $              | 8,661  |       |  | $    | 8,663  | 
|Mature in 12 years |  |                | 25,159 |       |  |      | 25,076 | 
|                    |  |                |        |       |  |      |        | 
|                    |  | $              | 33,820 |       |  | $    | 33,739 | 
|                    |  |                |        |       |  |      |        | 

Investment income included in interest and other income, net was $2.2
million in 2003, $3.1 million in 2002 and $4.5 million in 2001.

Note 5. Property and Equipment, net

Property and equipment, net (and their related useful lives) consisted of
the following:

|                                             |  |                |        |      |  |   |        | 
|-------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                             |  | December 31,  
|                                             |  |               
|                                             |  | 2003           |        | 2002
|                                             |  |                |        |     
|                                             |  | (in thousands)
|Computer and office equipment (2 to 4 years) |  | $              | 28,161 |      |  | $ | 28,954 | 
|Furniture and fixtures (5 years)             |  |                | 5,111  |      |  |   | 5,923  | 
|Leasehold improvements (1 to 5 years)        |  |                | 13,278 |      |  |   | 15,522 | 
|Software and development costs (3 years)     |  |                | 14,495 |      |  |   | 13,435 | 
|                                             |  |                |        |      |  |   |        | 
|                                             |  |                | 61,045 |      |  |   | 63,834 | 
|Less accumulated depreciation                |  |                | 50,474 |      |  |   | 43,675 | 
|                                             |  |                |        |      |  |   |        | 
|                                             |  | $              | 10,571 |      |  | $ | 20,159 | 
|                                             |  |                |        |      |  |   |        | 

Depreciation expense was $12.7 million in 2003, $19.4 million in 2002 and
$18.3 million in 2001.

As a result of the 2003 restructuring activities, the Company wrote-off
property and equipment with a net book value of $1.6 million associated with
the Facilities Reduction Plan and European Restructuring Plan. See Note 3 to
the consolidated financial statements.

Note 6. Goodwill and Other Assets, net

Goodwill and other assets, net consisted of the following:

|                                                                                                            |  |                |       |      |  |   |       | 
|----------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                                                                                            |  | December 31,  
|                                                                                                            |  |               
|                                                                                                            |  | 2003           |       | 2002
|                                                                                                            |  |                |       |     
|                                                                                                            |  | (in thousands)
|Goodwill                                                                                                    |  | $              | 2,000 |      |  | $ | 2,000 | 
|Investment in Adexa                                                                                         |  |                | 889   |      |  |   | 889   | 
|Patent and trademark costs and other assets, net of
accumulated amortization of $173 and $129, respectively |  |                | 1,577 |      |  |   | 1,466 | 
|                                                                                                            |  |                |       |      |  |   |       | 
|                                                                                                            |  | $              | 4,466 |      |  | $ | 4,355 | 
|                                                                                                            |  |                |       |      |  |   |       | 

Amortization
expense was $44,000, $44,000 and $47.8 million in 2003, 2002
and 2001 respectively. The Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets on January 1, 2002, and no longer
records goodwill amortization. In connection with adopting this standard, a
transitional impairment loss of $5.3 million was recognized as the cumulative
effect of an accounting change. The Company completed its annual impairment
test of goodwill in Q1 2003 and concluded

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at that time, that it did not have any impairment of goodwill based on
estimated fair value of discounted cash flows. Estimated amortization expense
for each of the successive five years ended through 2008 is $44,000.

The following unaudited pro forma financial information presents our
results of operations and earnings per share (EPS) as if goodwill had not
been amortized or impaired in 2001:

|                                          |  |                                          |         |      |  |      |       |     |  |   |         |     |  |   |       |   |  |   |          |   |  |   |       |  
|----------------------------------------- |  | ---------------------------------------- | ------- | ---- |  | ---- | ----- | --- |  | - | ------- | --- |  | - | ----- | - |  | - | -------- | - |  | - | ----- | -
|                                          |  | Year Ended December 31,                 
|                                          |  |                                         
|                                          |  | 2003                                     |         | 2002 |  | 2001
|                                          |  |                                          |         |      |  |     
|                                          |  | $                                        |         | EPS  |  | $    |       | EPS |  | $ |         | EPS
|                                          |  |                                          |         |      |  |      |       |     |  |   |         |    
|                                          |  | (in thousands, except per share amounts)
|Reported loss before change in
Accounting |  | $                                        | (30,894 | )    |  | $    | (0.74 | )   |  | $ | (12,268 | )   |  | $ | (0.30 | ) |  | $ | (295,231 | ) |  | $ | (7.48 | )
|Add back: Goodwill amortization           |  |                                          |        |      |  |      |      |     |  |   |        |     |  |   |      |   |  |   | 47,770   |   |  |   | 1.21  |  
|Add back: Goodwill impairment             |  |                                          |        |      |  |      |      |     |  |   |        |     |  |   |      |   |  |   | 204,261  |   |  |   | 5.18  |  
|                                          |  |                                          |         |      |  |      |       |     |  |   |         |     |  |   |       |   |  |   |          |   |  |   |       |  
|Adjusted loss before change in
accounting |  | $                                        | (30,894 | )    |  | $    | (0.74 | )   |  | $ | (12,268 | )   |  | $ | (0.30 | ) |  | $ | (43,200  | ) |  | $ | (1.09 | )
|                                          |  |                                          |         |      |  |      |       |     |  |   |         |     |  |   |       |   |  |   |          |   |  |   |       |  
|Reported net loss                         |  | $                                        | (30,894 | )    |  | $    | (0.74 | )   |  | $ | (17,595 | )   |  | $ | (0.42 | ) |  | $ | (295,231 | ) |  | $ | (7.48 | )
|Add back: Goodwill amortization           |  |                                          |        |      |  |      |      |     |  |   |        |     |  |   |      |   |  |   | 47,770   |   |  |   | 1.21  |  
|Add back: Goodwill impairment             |  |                                          |        |      |  |      |      |     |  |   |        |     |  |   |      |   |  |   | 204,261  |   |  |   | 5.18  |  
|                                          |  |                                          |         |      |  |      |       |     |  |   |         |     |  |   |       |   |  |   |          |   |  |   |       |  
|Adjusted net loss                         |  | $                                        | (30,894 | )    |  | $    | (0.74 | )   |  | $ | (17,595 | )   |  | $ | (0.42 | ) |  | $ | (43,200  | ) |  | $ | (1.09 | )
|                                          |  |                                          |         |      |  |      |       |     |  |   |         |     |  |   |       |   |  |   |          |   |  |   |       |  

Concurrently with the termination of its proposed merger, the Company made
a $6.0 million investment in Adexa in June 2001. This investment represented
approximately 3% of the outstanding shares of Adexa. In the first quarter of
2002, the Company recorded a $4.7 million loss on its investment in Adexa based
on a review of Adexas financial results and general market conditions. Also,
in the third quarter of 2002, the Company recorded a $371,000 loss on its
investment in Adexa based on a valuation determined by financing completed by
Adexa in July 2002. The Company concluded after each of these reviews that
there was an other-than-temporary decline in the value of its investment in
Adexa.

Note 7. Other Current Liabilities

Other current liabilities consisted of the following:

|                                           |  |                |        |      |  |   |        | 
|------------------------------------------ |  | -------------- | ------ | ---- |  | - | ------ | 
|                                           |  | December 31,  
|                                           |  |               
|                                           |  | 2003           |        | 2002
|                                           |  |                |        |     
|                                           |  | (in thousands)
|Deferred revenue                           |  | $              | 6,505  |      |  | $ | 6,027  | 
|Accrued payroll, operating and other taxes |  |                | 6,661  |      |  |   | 6,780  | 
|Other                                      |  |                | 5,854  |      |  |   | 8,801  | 
|                                           |  |                |        |      |  |   |        | 
|                                           |  | $              | 19,020 |      |  | $ | 21,608 | 
|                                           |  |                |        |      |  |   |        | 

Note 8. Debt

Debt consisted of the following:

|              |                      |   |                |     |      |   |       |       | 
|------------- | -------------------- | - | -------------- | --- | ---- | - | ----- | ----- | 
|              |                      |   | December 31,  
|              |                      |   |               
|              |                      |   | 2003           |     | 2002
|              |                      |   |                |     |     
|              |                      |   | (in thousands)
|(A) Term loan |                      | $ | 722            |     |      | $ | 2,556 |      
|(A) Revolver  |                      |   |               |     |      |   |      |      
|(B) MELF      |                      |   | 438            |     |      |   |      |      
|              | Other                |   |                |    |      |   |       | 274   | 
|              |                      |   |                |     |      |   |       |      
|              |                      |   | 1,160          |     |      |   | 2,830 |      
|              | Less current portion |   |                | 818 |      |   |       | 1,502 | 
|              |                      |   |                |     |      |   |       |      
|              |                      | $ | 342            |     |      | $ | 1,328 |      
|              |                      |   |                |     |      |   |       |      



| | (A) |  | In October 2001, the Company entered into a third amendment to its
bank credit facility agreement, consisting of a one-year Revolving
Credit Facility with a maximum principal amount of $20.0 million and a
$4.0 million Term Loan to be paid in 36 monthly installments. Proceeds
from the Term Loan were used to retire the $3.7 million outstanding
under the old Revolving Credit Facility. In October 2002 and December
2002, the Company entered into a fourth and fifth amendment,
respectively, which extended the maturity date of the Revolving Credit
Facility through December 2002 and February 2003, respectively. The
Company entered into the sixth amendment to the Revolving Credit
facility in February 2003, 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. In December 2003, the
Company entered into the seventh amendment, which modified the financial
covenant
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |     |  | on minimum earnings to exclude non-recurring restructuring charges
relating to its facilities reduction plan and the European Restructuring
Plan for the quarter ended December 31, 2003. Funds borrowed under the
line of credit may be used for working capital requirements and general
corporate purposes. At December 31, 2003, $11.3 million was available
under the Revolving Credit Facility based on eligible accounts receivable,
which is reduced by $771,000 in outstanding letters of credit. The
Revolving Credit Facility bears interest at the lenders prime rate, which
was 4.0% at December 31, 2003. The Term Loan bears interest at the
lenders prime rate +0.50%.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (B) |  | In March 2003, the Company entered into a loan agreement (MELF)
with the Commonwealth of Pennsylvania, acting by and through the
Department of Community and Economic Development. Proceeds from the
loan agreement in the amount of $500,000 were for the purchase of
computer equipment. Repayments under the MELF are made monthly through
April 2008 at an interest rate of 3.0%.                                                                                                                                                                                                                                                                                                 

The Revolving Credit Facility and the Term Loan contain restrictive
covenants, including a limitation on incurring additional indebtedness and
paying dividends. The Company is also required to satisfy monthly minimum
tangible net worth, minimum earnings and minimum quick ratios, as defined in
the underlying agreement. The Company has pledged substantially all of its
tangible assets as collateral for the Revolving Credit Facility.

Interest expense was $102,000 in 2003, $228,000 in 2002 and $300,000 in
2001. The weighted average interest rate was 5.2% in 2003, 6.6% in 2002 and
6.9% in 2001.

Scheduled maturities of debt for each of the years ending December 31 are
as follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2004 |  | $ | 818   | 
|2005 |  |   | 99    | 
|2006 |  |   | 102   | 
|2007 |  |   | 105   | 
|2008 |  |   | 36    | 
|     |  |   |       | 
|     |  | $ | 1,160 | 
|     |  |   |       | 

Note 9. Commitments and Contingencies

The Company leases office space and equipment under operating leases
expiring through 2010. In October 1998, the Company entered into an Office
Lease Agreement (the Lease), as amended in March and June 1999 and March
2000, that significantly expanded the Companys office space within the City of
Pittsburgh, Pennsylvania. The Lease, which currently provides for 182,000
square feet and the option for additional expansion within the same building,
expires in May 2010.

Operating lease rental expense amounted to $7.0 million in 2003, $7.3
million in 2002 and $7.5 million in 2001. The following is a schedule of future
minimum lease payments under all operating leases through December 31 of each
of the following years (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 6,741  | 
|2005       |  |   | 6,164  | 
|2006       |  |   | 5,083  | 
|2007       |  |   | 5,024  | 
|2008       |  |   | 5,152  | 
|Thereafter |  |   | 7,518  | 
|           |  |   |        | 
|           |  | $ | 35,682 | 
|           |  |   |        | 

Since April 27, 2001, eleven securities fraud class action complaints have
been filed against the Company and two executive officers in federal court in
Pittsburgh, Pennsylvania. The complaints, all of which assert the same claims,
stem from the Companys announcement on April 23, 2001 that, as a result of
discussions with the SEC, the Company was considering amending its 2000
financial statements for the purpose of reclassifying fees earned by the
Company under a service contract with Visteon. All of the cases have been
consolidated into a single proceeding. On October 30, 2001, the Company filed a
motion seeking to dismiss all of the cases in their entirety. On January 17,
2003, the Court denied the motion to dismiss. The plaintiffs have filed a
motion for class certification which is still pending before the Court.
Discovery is in the early stages. 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

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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.

The Company is also subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Companys consolidated results of
operations or financial position.

Note 10. Income Taxes

The provision for income taxes consisted of the following:

|        |  |                |       |      |  |      |     |  |  |   |     | 
|------- |  | -------------- | ----- | ---- |  | ---- | --- |  |  | - | --- | 
|        |  | December 31,  
|        |  |               
|        |  | 2003           |       | 2002 |  | 2001
|        |  |                |       |      |  |     
|        |  | (in thousands)
|Foreign |  | $              | 1,188 |      |  | $    | 712 |  |  | $ | 782 | 

There has been no provision for U.S. federal or state income taxes as the
Company has incurred a net taxable loss in each of these periods. The Company
recorded foreign income tax provisions relating to taxes withheld from customer
payments and remitted to foreign taxing jurisdictions on the Companys behalf,
as well as income taxes generated in certain foreign jurisdictions.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Companys deferred tax assets are as follows:

|                                                  |                          |   |                |         |      |   |        |         |  
|------------------------------------------------- | ------------------------ | - | -------------- | ------- | ---- | - | ------ | ------- | -
|                                                  |                          |   | December 31,  
|                                                  |                          |   |               
|                                                  |                          |   | 2003           |         | 2002
|                                                  |                          |   |                |         |     
|                                                  |                          |   | (in thousands)
|Net operating losses                              |                          | $ | 58,475         |         |      | $ | 58,125 |        
|Capitalized research and experimentation costs    |                          |   | 8,334          |         |      |   | 9,608  |        
|Accrued expenses                                  |                          |   | 2,535          |         |      |   | 2,810  |        
|Accrued restructuring charges                     |                          |   | 2,832          |         |      |   |       |        
|Goodwill                                          |                          |   | 4,490          |         |      |   | 4,963  |        
|Research and experimentation credit carryforwards |                          |   | 4,692          |         |      |   | 3,546  |        
|Depreciation                                      |                          |   | 5,655          |         |      |   | 4,655  |        
|Capital loss carryforward                         |                          |   | 2,160          |         |      |   | 2,044  |        
|Deferred stock-based expense                      |                          |   | 631            |         |      |   | 600    |        
|Other                                             |                          |   | 3,414          |         |      |   | 1,948  |        
|                                                  |                          |   |                |         |      |   |        |        
|                                                  | Net deferred tax assets  |   |                | 93,218  |      |   |        | 88,299  |  
|                                                  | Less valuation allowance |   |                | (93,218 | )    |   |        | (88,299 | )
|                                                  |                          |   |                |         |      |   |        |        
|                                                  |                          | $ |               |         |      | $ |       |        
|                                                  |                          |   |                |         |      |   |        |        

The realization of deferred tax assets is dependent upon future earnings,
if any, while the timing and amount of which are

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uncertain. Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. The valuation allowance increased by approximately
$4.9 million during 2003.

As of December 31, 2003, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $146.2 million,
which will expire beginning in years 2010 and 2005, respectively. Included in
the deferred tax asset related to net operating loss carryforwards is a tax
benefit attributable to employee stock options of approximately $21.1 million
at December 31, 2003, which, when realized, will be a credit to additional
capital. In addition, the Company had federal tax credit carryforwards of
approximately $4.7 million, which expire beginning 2010.

Utilization of the Companys net operating loss and tax credit
carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations imposed by Internal Revenue Code Section 382 and
similar state provisions. Such an annual limitation could result in the
expiration of the net operating loss and tax credit carryforwards before
utilization.

Note 11. Stockholders Equity

The following is a summary of share activity for all classes of stock:

|                                 |                                                |  |        |        |                |  |       |      |  
|-------------------------------- | ---------------------------------------------- |  | ------ | ------ | -------------- |  | ----- | ---- | -
|                                 |                                                |  | Common |        | Stock Purchase
|                                 |                                                |  | Stock  |        | Warrants      
|                                 |                                                |  |        |        |               
|Outstanding at December 31, 2000 |                                                |  | 38,788 |        |                |  | 1,750 |     
|                                 | Shares issued to Mitsubishi                    |  |        | 194    |                |  |       |     |  
|                                 | Shares issued for Employee Stock Purchase Plan |  |        | 227    |                |  |       |     |  
|                                 | Stock purchase warrants exercised by Visteon   |  |        | 350    |                |  |       | (350 | )
|                                 | Options exercised by employees                 |  |        | 1,172  |                |  |       |     |  
|                                 |                                                |  |        |        |                |  |       |     
|Outstanding at December 31, 2001 |                                                |  | 40,731 |        |                |  | 1,400 |     
|                                 | Shares issued for Employee Stock Purchase Plan |  |        | 337    |                |  |       |     |  
|                                 | Options exercised by employees                 |  |        | 1,308  |                |  |       |     |  
|                                 |                                                |  |        |        |                |  |       |     
|Outstanding at December 31, 2002 |                                                |  | 42,376 |        |                |  | 1,400 |     
|                                 | Shares purchased and retired                   |  |        | (1,299 | )              |  |       |     |  
|                                 | Shares issued for Employee Stock Purchase Plan |  |        | 390    |                |  |       |     |  
|                                 | Options exercised by employees                 |  |        | 870    |                |  |       |     |  
|                                 |                                                |  |        |        |                |  |       |     
|Outstanding at December 31, 2003 |                                                |  | 42,337 |        |                |  | 1,400 |     
|                                 |                                                |  |        |        |                |  |       |     

Preferred Stock

The Companys Board of Directors has the authority, without further action
by the stockholders, to issue up to 5.0 million shares of preferred stock in
one or more series and to designate the rights, preferences, privileges and
restrictions of each series.

In March 2003, the Board of Directors declared a dividend of one right
(collectively, Rights) to purchase one one-hundredth of a share of a newly
created class of Series A Junior Participating Preferred Stock (Series A
Preferred Stock), payable to stockholders of record at the close of business
on March 11, 2003. The Rights will not be exercisable until 10 days after the
public announcement that a person or group has become an Acquiring Person by
obtaining beneficial ownership of 15% or more of the Companys outstanding
common stock, or, if earlier, 10 business days (or a later date determined by
the Board before any person or group becomes an Acquiring Person) after a
person or group begins a tender or exchange offer which, if consummated, would
result in that person or group becoming an Acquiring Person. Each Right
entitles the holder, upon certain specified events, to purchase, at an exercise
price of $42.00 per Right (subject to adjustment), shares of common stock of
the Company or an Acquiring Person having a value equal to two times the
exercise price of the Right.

Common Stock

In December 2001, the Company sold 194,000 shares of common stock to
Mitsubishi Corporation at a price of $15.46 per share (based on the average of
the closing prices of our common stock over the 20 trading days prior to the
sale) for a total purchase price of $3.0 million.

In January 2003, the Board of Directors of the Company authorized the
repurchase of up to an aggregate of 15% of the Companys outstanding common
stock from time to time on the open market or in one or more negotiated
transactions. In 2003, the Company purchased and retired 1,298,500 shares at a
weighted average share price of $4.93.

Stock Purchase Warrants

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In April 2000, the Company entered into a five-year service contract with
Visteon. Under the terms of the contract, Visteon pays the Company a fixed
monthly fee for access to the Companys sourcing technology and services, and
may pay the Company variable fees if specified volume thresholds are exceeded.
At the time the Company entered into the service contract, the Company granted
a warrant to Visteon, with an exercise price of $.01 per share, to purchase
1.75 million shares of the Companys common stock. The Company receives ongoing
marketing and public relations benefits as a result of its relationship with
Visteon. The warrant was valued at $95.5 million using the Black-Scholes
pricing model. This value is being amortized on a straight-line basis over the
five-year term of the contract, of which $19.1 million was amortized in each of
2003, 2002 and 2001. This amortization has been reclassified as a reduction to
revenues to the extent of the $12.4 million, $11.3 million and $11.3 million in
fees earned from Visteon in 2003, 2002 and 2001, respectively, and the
remaining $6.7 million, $7.8 million and $7.8 million as stock compensation and
warrant costs in 2003, 2002 and 2001, respectively. Visteon exercised 350,000
warrants in July 2001, resulting in total proceeds of $3,000 and a $19.1
million transfer from stock purchase warrants to additional capital.

Accumulated Other Comprehensive (Loss)

The following is a summary of the components of accumulated other
comprehensive income (loss), net of income taxes:

|                                                 |  |                |     |      |  |      |     |   |  |   |     | 
|------------------------------------------------ |  | -------------- | --- | ---- |  | ---- | --- | - |  | - | --- | 
|                                                 |  | December 31,  
|                                                 |  |               
|                                                 |  | 2003           |     | 2002 |  | 2001
|                                                 |  |                |     |      |  |     
|                                                 |  | (in thousands)
|Foreign currency translation adjustments         |  | $              | 301 |      |  | $    | (49 | ) |  | $ | 354 | 
|Unrealized (loss) gain on marketable investments |  |                | (81 | )    |  |      | 48  |   |  |   | 197 | 
|                                                 |  |                |     |      |  |      |     |   |  |   |     | 
|                                                 |  | $              | 220 |      |  | $    | (1  | ) |  | $ | 551 | 
|                                                 |  |                |     |      |  |      |     |   |  |   |     | 

Note 12. Employee Benefit Plans

401(k) Savings Plan

The Company maintains a savings plan (the Savings Plan) that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, eligible employees may contribute a certain
percentage of their pre-tax earnings up to the annual limit set by the Internal
Revenue Service. The Company is not required to contribute to the Savings Plan,
and prior to 2002 had made no contributions since its inception. In each of
2003 and 2002, the Company expensed approximately $500,000 as a discretionary
contribution to the Plan. The Companys contributions to the Savings Plan vest
100% upon completion of one year of service. The current investment options
under the Savings Plan do not include the Companys common stock.

Employee Stock Purchase Plan

The Company maintains an employee stock purchase plan (ESPP), under
which 500,000 shares were initially reserved for issuance. The number of shares
reserved under the ESPP automatically increases on January 1 each year by the
number of shares purchased under the ESPP the preceding year, provided that the
aggregate number of shares reserved under the ESPP does not exceed 2,000,000
shares. The ESPP is intended to qualify under Section 423 of the Internal
Revenue Code. Under the ESPP, eligible employees may purchase common stock each
year in an amount not to exceed 20% of the employees annual cash compensation.
The purchase price per share is 85% of the lowest fair value at certain dates
defined in the ESPP. The Company issued approximately 390,000, 337,000 and
227,000 shares of common stock in 2003, 2002 and 2001, respectively, under the
ESPP.

Stock Option Plans

Prior to March 1998, the Company maintained a stock incentive plan (the
1996 Option Plan), which provided for the issuance of stock options and stock
appreciation rights to employees. Under the 1996 Option Plan, options were
granted at prices determined by the Board of Directors. The options granted are
exercisable in accordance with a vesting schedule, not to exceed 10 years. No
further stock options may be granted under the 1996 Option Plan.

In March 1998, the Company adopted the 1998 Stock Option Plan (the 1998
Option Plan). All available options in the 1996 Option Plan were transferred
into the 1998 Option Plan. All options outstanding under the 1996 Option Plan
as of the termination date continue in effect under their original terms. The
1998 Option Plan provides for the issuance of stock options to employees,
directors, consultants and advisors, which are granted at prices determined by
the Board of Directors. The options granted are exercisable in accordance with
a vesting schedule, not to exceed 10 years. Options held by certain executives
immediately vested 30% in connection with the IPO.

47



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In June 1999, the Company adopted an Amended and Restated Stock Incentive
Plan (the Stock Incentive Plan). The Stock Incentive Plan amended the 1998
Option Plan to increase the amount of shares reserved for the future issuance
of stock options and added certain change-of-control provisions, as well as
made other minor modifications. In January 2001, the Companys Board of
Directors amended and restated the Stock Incentive Plan to eliminate certain
change-of-control provisions. The amendment did not affect options previously
granted under the plan.

In May 2001, the Board adopted the 2001 Broad Based Equity Incentive Plan
(the 2001 Option Plan). The 2001 Option Plan provides for the issuance of
stock options to employees who are not directors or officers of the Company.

As of December 31, 2003, a total of 21.6 million stock options were
authorized under all of the Companys stock option plans, of which 13.1 million
were outstanding and 2.6 million remained available for future grants.

The following is a summary of stock option activity:

|                                           |           |  |            |                  |   |  |       |       | 
|------------------------------------------ | --------- |  | ---------- | ---------------- | - |  | ----- | ----- | 
|                                           |           |  | Number     | Weighted Average
|                                           |           |  | of Options | Exercise Price  
|                                           |           |  |            |                 
|Outstanding at December 31, 2000           |           |  | 10,605     |                  |   |  | 17.36 |      
|                                           | Granted   |  |            | 5,262            |   |  |       | 16.87 | 
|                                           | Forfeited |  |            | (2,271           | ) |  |       | 34.99 | 
|                                           | Exercised |  |            | (1,169           | ) |  |       | 2.21  | 
|                                           |           |  |            |                  |   |  |       |      
|Outstanding at December 31, 2001           |           |  | 12,427     |                  |   |  | 14.90 |      
|                                           | Granted   |  |            | 1,250            |   |  |       | 12.59 | 
|                                           | Forfeited |  |            | (1,427           | ) |  |       | 17.97 | 
|                                           | Exercised |  |            | (1,308           | ) |  |       | 2.79  | 
|                                           |           |  |            |                  |   |  |       |      
|Outstanding at December 31, 2002           |           |  | 10,942     |                  |   |  | 15.67 |      
|                                           | Granted   |  |            | 5,046            |   |  |       | 4.37  | 
|                                           | Forfeited |  |            | (1,971           | ) |  |       | 13.19 | 
|                                           | Exercised |  |            | (870             | ) |  |       | 2.81  | 
|                                           |           |  |            |                  |   |  |       |      
|Outstanding at December 31, 2003           |           |  | 13,147     |                  |   |  | 12.55 |      
|                                           |           |  |            |                  |   |  |       |      
|Shares exercisable as of December 31, 2003 |           |  | 6,615      |                  |   |  | 15.04 |      
|                                           |           |  |            |                  |   |  |       |      

The following is a summary of the options outstanding as of December 31,
2003 (in thousands):

|                                                       |  |         |            |         |  |         |       |         |  |         |             |         |  |       |              |  |  |   |              |  |  |   |               |  |  |   |              | 
|------------------------------------------------------ |  | ------- | ---------- | ------- |  | ------- | ----- | ------- |  | ------- | ----------- | ------- |  | ----- | ------------ |  |  | - | ------------ |  |  | - | ------------- |  |  | - | ------------ | 
|                                                       |  | Range 1 |            | Range 2 |  | Range 3 |       | Range 4 |  | Range 5 |             | Range 6 |  | Total
|                                                       |  |         |            |         |  |         |       |         |  |         |             |         |  |      
|Range of exercise
Prices                               |  | $       | 0.54-$2.50 |         |  | $       | 4.03  |         |  | $       | 4.04-$12.50 |         |  | $     | 12.80-$14.80 |  |  | $ | 14.85-$19.75 |  |  | $ | 19.88-$234.25 |  |  | $ | 0.54-$234.25 | 
|Weighted average
exercise price                        |  |         | 1.15       |         |  |         | 4.03  |         |  |         | 8.06        |         |  |       | 14.09        |  |  |   | 18.88        |  |  |   | 47.47         |  |  |   | 12.55        | 
|Weighted average
remaining
contractual life
(in years) |  |         | 4.5        |         |  |         | 9.1   |         |  |         | 7.8         |         |  |       | 6.1          |  |  |   | 6.9          |  |  |   | 6.6           |  |  |   | 7.1          | 
|Exercisable                                            |  |         | 1,237      |         |  |         | 498   |         |  |         | 714         |         |  |       | 1,670        |  |  |   | 1,858        |  |  |   | 638           |  |  |   | 6,615        | 
|Outstanding                                            |  |         | 1,568      |         |  |         | 3,493 |         |  |         | 2,040       |         |  |       | 2,773        |  |  |   | 2,156        |  |  |   | 1,117         |  |  |   | 13,147       | 

All options were granted at exercise prices determined by the Board of
Directors. In 1999, the Company recorded $2.0 million of unearned stock
compensation related to employee stock option grants with exercise prices lower
than the deemed fair value of the underlying shares at the time of grant, of
which $80,000, $150,000 and $253,000 was amortized in 2003, 2002 and 2001,
respectively.

In July 2001, the Company offered option holders who were current
employees (excluding the Board of Directors, executive officers and employees
located outside of the United States) the opportunity to exchange outstanding
options with an exercise price of $20.00 per share or more for new options. The
number of shares subject to new options would be determined by application of
an exchange ratio based upon the exercise price of the options. The offer
expired on August 3, 2001. The exchange resulted in the voluntary cancellation
of employee stock options to purchase 181,000 shares of common stock in
exchange for the granting of 37,000 employee stock options in February 2002
with an exercise price of $21.62, which was the fair market value of the
Companys common stock on the grant date. There was no compensation expense
recorded as a result of this exchange.

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Note 13. Stock Compensation and Warrant Costs

Stock compensation and warrant costs includes charges resulting from stock
options and warrants granted at exercise prices less than fair value, as well
as certain modifications made to stock options of former employees. The
following table shows the amounts of stock compensation and warrant costs that
would have been recorded by category had stock compensation and warrant costs
been separately stated on the consolidated statements of operations:

|                         |  |                         |       |      |  |      |       |  |  |   |       | 
|------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                         |  | Year Ended December 31,
|                         |  |                        
|                         |  | 2003                    |       | 2002 |  | 2001
|                         |  |                         |       |      |  |     
|                         |  | (in thousands)         
|Research and development |  | $                       | 50    |      |  | $    | 95    |  |  | $ | 158   | 
|Sales and marketing      |  |                         | 6,733 |      |  |      | 7,903 |  |  |   | 8,411 | 
|                         |  |                         |       |      |  |      |       |  |  |   |       | 
|                         |  | $                       | 6,783 |      |  | $    | 7,998 |  |  | $ | 8,569 | 
|                         |  |                         |       |      |  |      |       |  |  |   |       | 

Note 14. Selected Quarterly Financial Data (unaudited)

The Companys quarterly results for 2003 and 2002 are as follows:

|                    |                   |         |                                          |         |        |         |        |         |        |       |        |       |   |   |        |       |   |   |         |       |  
|------------------- | ----------------- | ------- | ---------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ----- | ------ | ----- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                    |                   |         | First                                    |         | Second |         | Third  |         | Fourth |       |        |       |  
|2003:               |                   | Quarter |                                          | Quarter |        | Quarter |        | Quarter |        | Total
|                    |                   |         |                                          |         |        |         |        |         |        |      
|                    |                   |         | (in thousands, except per share amounts)
|Revenues            |                   | $       | 34,520                                   |         |        | $       | 34,633 |         |        | $     | 36,022 |       |   | $ | 33,541 |       |   | $ | 138,716 |      
|Net loss            |                   |         | (11,799                                  | )       |        |         | (5,963 | )       |        |       | (4,554 | )     |   |   | (8,578 | )     |   |   | (30,894 | )    
|Earnings per share: |                   |         |                                          |         |        |         |        |         |        |       |        |       |   |   |        |       |   |   |         |      
|                    | Basic and diluted |         |                                          | (0.28   | )      |         |        | (0.14   | )      |       |        | (0.11 | ) |   |        | (0.20 | ) |   |         | (0.74 | )

|                                     |                                               |         |                                          |         |        |         |        |         |        |       |        |       |   |   |        |       |   |   |         |       |  
|------------------------------------ | --------------------------------------------- | ------- | ---------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ----- | ------ | ----- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                                     |                                               |         | First                                    |         | Second |         | Third  |         | Fourth |       |        |       |  
|2002:                                |                                               | Quarter |                                          | Quarter |        | Quarter |        | Quarter |        | Total
|                                     |                                               |         |                                          |         |        |         |        |         |        |      
|                                     |                                               |         | (in thousands, except per share amounts)
|Revenues                             |                                               | $       | 43,173                                   |         |        | $       | 44,604 |         |        | $     | 40,388 |       |   | $ | 42,276 |       |   | $ | 170,441 |      
|Net loss before change in accounting |                                               |         | (6,191                                   | )       |        |         | (87    | )       |        |       | (3,024 | )     |   |   | (2,966 | )     |   |   | (12,268 | )    
|Net loss after change in accounting  |                                               |         | (11,518                                  | )       |        |         | (87    | )       |        |       | (3,024 | )     |   |   | (2,966 | )     |   |   | (17,595 | )    
|Earnings per share:                  |                                               |         |                                          |         |        |         |        |         |        |       |        |       |   |   |        |       |   |   |         |      
|                                     | Basic and diluted before change in accounting |         |                                          | (0.15   | )      |         |        | (0.00   | )      |       |        | (0.07 | ) |   |        | (0.07 | ) |   |         | (0.30 | )
|                                     | Basic and diluted after change in accounting  |         |                                          | (0.28   | )      |         |        | (0.00   | )      |       |        | (0.07 | ) |   |        | (0.07 | ) |   |         | (0.42 | )

Note 15. Subsequent Events

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.

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

Also in January 2004, the Company executed a restructuring plan resulting
in the elimination of 65 positions in its global workforce. Additionally, in
February 2004, the Company evaluated its office space in Pittsburgh,
Pennsylvania, and determined that it will cease using one of the floors it
currently leases in its global headquarters. In accordance with SFAS No. 146,
the Company will record a restructuring charge of approximately $4.4 million in
the first quarter of 2004, covering these severance and lease costs.

49



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##### Table of Contents






Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.




Item 9A. 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.




PART III




Item 10. Directors and Executive Officers of the Registrant

The information set forth under the caption Election of Directors and
the subcaption Section 16 Reporting Compliance in the Proxy Statement and set
forth herein in Item 1, BusinessExecutive Officers is incorporated herein by
reference in response to this Item 10.




Item 11. Executive Compensation

The information set forth under the captions Executive Compensation and
Related Information in the Proxy Statement is incorporated herein by reference
in response to this Item 11.




Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information set forth under the caption Beneficial Ownership of
Common Stock in the Proxy Statement is incorporated herein by reference in
response to this Item 12.

Securities Authorized For Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2003 regarding
compensation plans and arrangements under which equity securities of
FreeMarkets are authorized for issuance. Certain of our equity compensation
plans provide for the issuance of restricted stock. Footnote (7) to the table
sets forth information with respect to such restricted stock. The table does
not include information with respect to outstanding options that were assumed
by us in connection with our acquisition of iMark in March 2000. Footnote (8)
to the table sets forth information with respect to such assumed options.

50



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|                                                                         |  |                      |        |                      |  |                          |       |                     |  |                      |       |    
|------------------------------------------------------------------------ |  | -------------------- | ------ | -------------------- |  | ------------------------ | ----- | ------------------- |  | -------------------- | ----- | ---
|                                                                         |  |                      |        |                      |  |                          |       |                     |  | Number of securities
|                                                                         |  |                      |        |                      |  |                          |       |                     |  | remaining available 
|                                                                         |  | Number of securities |        |                      |  |                          |       | for future issuance
|                                                                         |  | to be issued upon    |        | Weighted average     |  | under equity            
|                                                                         |  | exercise of          |        | exercise price of    |  | compensation plans      
|                                                                         |  | outstanding options, |        | outstanding options, |  | (excluding securities   
|                                                                         |  | warrants and rights  |        | warrants and rights  |  | reflected in column (a))
|Plan category                                                            |  | (a)                  |        | (b)                  |  | (c)                     
|                                                                         |  |                      |        |                      |  |                         
|                                                                         |  | (in thousands)      
|Equity compensation plans approved
by security holders (1)               |  |                      | 10,853 | (4)                  |  |                          | 12.97 |                     |  |                      | 2,359 | (5)
|Equity compensation plans not
approved by security holders
(2)           |  |                      | 2,294  |                      |  |                          | 10.59 |                     |  |                      | 195   | (6)
|Individual compensation arrangement
not approved by security holders
(3) |  |                      | 1,400  |                      |  |                          | 0.01  |                     |  |                      |      |    
|                                                                         |  |                      |        |                      |  |                          |       |                     |  |                      |       |    
|Total                                                                    |  |                      | 14,547 |                      |  |                          | 11.35 |                     |  |                      | 2,554 |    
|                                                                         |  |                      |        |                      |  |                          |       |                     |  |                      |       |    



---

|(1) |  | Consists of the 1996 Stock Incentive Plan, the Second Amended and
Restated Incentive Plan and the Amended and Restated Employee Stock
Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Consists of the 2001 Broad Based Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) |  | Consists of warrant issued to Visteon Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(4) |  | Excludes purchase rights under the Amended and Restated Employee Stock
Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(5) |  | The number of shares of common stock that may be subject to grants under
the Second Amended and Restated Incentive Plan is automatically increased
on the first day of each fiscal year ending on or before December 31, 2008
by a number equal to the lesser of (i) 1,500,000 shares, (ii) 3% of the
shares outstanding on the last day of the immediately preceding fiscal
year, or (iii) such lesser number of shares as is determined by the Board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(6) |  | The maximum number of shares of common stock that may be subject to
grants under the 2001 Broad Based Plan is automatically increased on the
first day of each fiscal year ending on or before December 31, 2010 by a
number equal to the lesser of (i) 250,000 shares, (ii) 1% of the shares
outstanding on the last day of the immediately preceding fiscal year, or
(iii) such lesser number of shares as is determined by the Board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(7) |  | Under the Second Amended and Restated Incentive Plan and the 2001 Broad
Based Plan, the Company may grant shares of stock which are subject to
forfeiture risks and restrictions on transferability (restricted stock).
The restrictions on the restricted stock lapse, and the shares vest, in
accordance with the schedule set forth in the individual holders
restricted stock agreement. During the period in which shares are subject
to restriction, the holder may not sell or otherwise dispose of the
restricted stock. In the event that the holders employment is terminated
prior to the lapse of restrictions, the shares subject to restriction are
forfeited in exchange for the purchase price paid, if any, for such
shares. The restrictions of shares of restricted stock will lapse in the
event of a change of control of FreeMarkets in which the acquiring
corporation does not assume or replace the shares of restricted stock. As
of December 31, 2002, no shares of restricted stock had been granted under
the Amended and Restated Incentive Plan or the 2001 Broad Based Equity
Incentive Plan.
|   
|(8) |  | As of December 31, 2003, there were 93 shares issuable upon exercise of
options assumed by us in connection with our acquisition of iMark in March
2000. The weighted average exercise price of those options is $53.49 per
share. No additional options may be granted under the iMark option plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

2001 Broad Based Plan

The 2001 Broad Based Plan was adopted by the Board of Directors on May 16,
2001. The 2001 Broad Based Plan has not been approved by our stockholders.
Options to purchase shares of our common stock and shares of restricted stock
may be awarded under the 2001 Broad Based Plan to employees of FreeMarkets and
its subsidiaries other than employees who are directors or officers (as

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defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as
amended). The maximum number of shares of common stock that may be subject to
grants under the 2001 Broad Based Plan is 2,000,000, plus an automatic annual
increase beginning on or after January 1, 2002 and ending on or before December
31, 2010 as described in footnote (6) above. Options are granted at an exercise
price and subject to such vesting schedule and other terms as may be determined
by the Board or the committee of the Board administering the plan. All options
are non- qualified stock options under federal tax laws. The vesting of options
will accelerate in the event of a change-of-control of FreeMarkets in which the
acquiring corporation does not assume or replace the options. See footnote (7)
for a description of restricted stock that may be issued under the 2001 Broad
Based Plan.

Warrant Issued to Visteon Corporation

In April 2000, the Company issued a warrant to Visteon, with an exercise
price of $.01 per share, to purchase 1,750,000 shares of the Companys common
stock. The warrant was issued to Visteon concurrently with the execution of a
five-year access and services agreement that provides for fixed monthly fees in
return for FullSource software and services. The Company granted the warrant in
consideration of the marketing and public relations benefits that it would
receive as a result of its ability to publicize its relationship with Visteon.
The shares subject to the warrant are exercisable by Visteon, in whole or in
part, at any time and from time to time during the period beginning on May 1,
2008 and ending on May 1, 2009, subject to the right of Visteon to exercise the
warrant in annual increments during the five-year term of the access and
services agreement, if certain revenue and market volume targets significantly
beyond the amounts committed in the access and services agreement are met.
Visteon purchased 350,000 shares of Common Stock upon partial exercise of the
warrant in July 2001. Immediately prior to the closing of the
proposed merger with Auba, all outstanding warrants will be deemed
exercised.




Item 13. Certain Relationships and Related Transactions

The information set forth under the caption Certain Relationships and
Related Transactions in the Proxy Statement is incorporated herein by
reference in response to this Item 13.




Item 14. Principal Accountant Fees and Services

The information set forth under the caption Proposal No. 2  Ratification
of Independent Accountant in the Proxy Statement is incorporated herein by
reference in response to this Item 14.

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PART IV




Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  Documents filed as part of this report:



| | 1. |  | Financial Statements and Supplementary Data. The following Financial
Statements of the Company are filed with this Form 10-K:
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------

|                                                                                                                  |  |  |    | 
|----------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Auditors                                                                                    |  |  | 34 | 
|Consolidated Balance Sheets as of December 31, 2003 and
2002                                                      |  |  | 35 | 
|Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2003           |  |  | 36 | 
|Consolidated Statements of Stockholders Equity for each of
the three years in the period ended December 31, 2003 |  |  | 37 | 
|Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003           |  |  | 38 | 
|Notes to Consolidated Financial Statements                                                                        |  |  | 39 | 



| | 2. |  | Financial Statement Schedules. The following financial statement
schedule is filed as part of this Annual Report on Form 10-K:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------

Schedule IIValuation and Qualifying Accounts



| | 3. |  | Exhibits. The Exhibits listed below are filed or incorporated by
reference as part of this Form 10-K. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                              
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|3.1     |  | Registrants Amended and Restated Certificate of
Incorporation, as amended by Certificate of Amendment dated
May 12, 2000. (1)                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|3.2     |  | Registrants Amended and Restated Bylaws. (2)                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.1   |  | Service and Market Access Agreement made as of October 19,
2000 and effective as of January 1, 2001 by and between the
registrant and United Technologies Corporation. (3)                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.2(a) |  | Lease Agreement between the registrant and One Oliver
Associates Limited Partnership dated October 21, 1998. (4)                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.2(b) |  | First Amendment to Lease between the registrant and One
Oliver Associates Limited Partnership dated March 30, 1999.
(4)                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.2(c) |  | Second Amendment to Lease between the registrant and One
Oliver Associates Limited Partnership dated June 1999. (5)                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.2(d) |  | Third Amendment to Lease between the registrant and One
Oliver Associates Limited Partnership dated March 2000. (13)                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.3(a) |  | Credit Agreement dated as of November 3, 2000 by and among
the registrant and the banks party thereto and PNC Bank,
National Association, as administrative agent, and Silicon
Valley Bank, as syndication agent, as amended by the First
Amendment dated as of December 2, 2000, the Second Amendment
dated as of February 7, 2001 and the Third Amendment dated
as of October 31, 2001. (6)
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.3(b) |  | Fourth 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 October 10, 2002. (13)                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|10.3(c) |  | Fifth Amendment to Credit Agreement between the registrant
and the banks party thereto and PNC Bank, National
Association, as administrative agent, and Silicon Valley                                                                                                                                                                                                                       

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|         |  |                                                                                                                                                                                                                                    
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                    
|Number   |  | Description                                                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                    
|         |  | Bank, as syndication agent, dated as of December 26, 2002. (13)                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                    
|10.3(d)  |  | Sixth 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 28, 2003.  
|         |  |                                                                                                                                                                                                                                    
|10.3(e)  |  | Seventh 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 December 18, 2003.
|         |  |                                                                                                                                                                                                                                    
|10.4     |  | Registrants 1996 Stock Incentive Plan. (4)                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                    
|10.5     |  | Registrants Second Amended and Restated Stock Incentive
Plan. (7)                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                    
|10.6     |  | Registrants Amended and Restated Employee Stock Purchase
Plan. (8)                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                    
|10.7     |  | Form of Indemnification Agreement between the registrant and
each of its directors and officers. (9)                                                                                                                               
|         |  |                                                                                                                                                                                                                                    
|10.8     |  | Restricted Stock Purchase Agreement between Thomas J.
Meredith and the registrant dated as of November 23, 1999.
(10)                                                                                                              
|         |  |                                                                                                                                                                                                                                    
|10.9    |  | Long Term Access and Services Agreement dated as of April
17, 2000 by and between the registrant and Visteon
Corporation. (11)                                                                                                     
|         |  |                                                                                                                                                                                                                                    
|10.10   |  | Common Stock Purchase Warrant of the registrant issued to
Visteon Corporation dated April 17, 2000. (11)                                                                                                                           
|         |  |                                                                                                                                                                                                                                    
|10.11(a) |  | 1998 Stock Option Grant Certificate (Raymond L. Lane). (12)                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                    
|10.11(b) |  | 1998 Stock Option Grant Certificate (Thomas J. Meredith).
(12)                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                    
|10.12    |  | 2001 Broad Based Equity Incentive Plan.                                                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                    
|10.13    |  | 2002 Bonus Plan.                                                                                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                    
|21.1     |  | Subsidiaries of the registrant. (8)                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                    
|23.1     |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                    
|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 Chief
Financial Officer Relating to a Periodic Report Containing
Financial Statements                                                                                             



---

|   |  | Portions of this exhibit have been omitted based on a request for
confidential treatment filed with the SEC. The omitted portions of the
exhibit have been filed separately with the SEC.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | Incorporated by reference to exhibit filed with the registrants
Registration Statement on Form S-8, as filed with the SEC on May 26,
2000.                                              
|   
|(2) |  | Incorporated by reference to exhibit filed with the registrants
Registration Statement on Form S-8, as filed with the SEC on July 10,
2001.                                             
|   
|(3) |  | Incorporated by reference to exhibit filed with the registrants Form
10-K for the year ended December 31, 2000, as filed with the SEC on
February 23, 2001.                             

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|(4)  |  | Incorporated by reference to exhibit filed with the Registration
Statement as filed with the SEC on September 8, 1999.                                                      
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(5)  |  | Incorporated by reference to exhibit filed with Amendment No. 2 to
the Registration Statement, as filed with the SEC on November 1, 1999.                                   
|    
|(6)  |  | Incorporated by reference to exhibit filed with the registrants Form
10-K for the year ended December 31, 2001, as filed with the SEC on
March 12, 2002.                   
|    
|(7)  |  | Incorporated by reference to exhibit filed with the registrants
Registration Statement on Form S-4, as filed with the SEC on February
23, 2001.                            
|    
|(8)  |  | Incorporated by reference to exhibit filed with the registrants
Annual Report on Form 10-K for the year ended December 31, 1999, as
filed with the SEC on March 16, 2000.  
|    
|(9)  |  | Incorporated by reference to exhibit filed with Amendment No. 5 to
the Registration Statement, as filed with the SEC on November 18, 1999.                                  
|    
|(10) |  | Incorporated by reference to exhibit filed with Amendment No. 6 to the
Registration Statement, as filed with the SEC on November 23, 1999.                                  
|    
|(11) |  | Incorporated by reference to exhibit filed with the registrants
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as
filed with the SEC in August 2, 2000.
|    
|(12) |  | Incorporated by reference to exhibit filed with the registrants
Registration Statement on Form S-4/A, as filed with the SEC on May 10,
2001.                               
|    
|(13) |  | Incorporated by reference to exhibit filed with the registrants Form
10-K for the year ended December 31, 2002, as filed with the SEC on March
14, 2003.                   

(b) Reports on Form 8-K

Form 8-K furnished on October 27, 2003 under Item 12, Results of
Operations and Financial Condition (with respect to a press release relating
to the Companys performance in the third quarter of 2003).

* * * * * *

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SIGNATURES

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.
FREEMARKETS, INC.

|                     |  |                                                                          |  |                    
|-------------------- |  | ------------------------------------------------------------------------ |  | -------------------
|Dated: March 1, 2004 |  |                                                                          |  |                    
|                     |  | By:                                                                      |  | /s/ SEAN M. ROLLMAN
|                     |  |                                                                          |  |                    
|                     |  | Sean M. Rollman                                                         
|                     |  | Vice President, Controller, Treasurer and acting Chief Financial Officer

Each person whose signature appears below hereby appoints David H.
McCormick and Sean M. Rollman, and both of them, either of whom may act without
the joinder of the other, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto and all other documents in connection therewith, with the Commission,
granting unto said attorneys-in-fact and agents full power and authority to
perform each and every act and thing appropriate or necessary to be done, as
fully and for all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                                           |  |                                                                               |  |              
|------------------------------------------ |  | ----------------------------------------------------------------------------- |  | -------------
|Signature                                  |  | Capacity                                                                      |  | Date         
|                                           |  |                                                                               |  |              
|/s/ GLEN T. MEAKEM

Glen T. Meakem         |  | Chairman of the Board and Director                                            |  | March 1, 2004
|                                           |  |                                                                               |  |              
|/s/ DAVID H. MCCORMICK

David H. McCormick |  | President, Chief Executive Officer
and Director (Principal Executive
Officer) |  | March 1, 2004
|                                           |  |                                                                               |  |              
|/s/ SEAN M. ROLLMAN

Sean M. Rollman       |  | Vice President, Controller,
Treasurer and acting Chief
Financial Officer      |  | March 1, 2004
|                                           |  |                                                                               |  |              
|/s/ DR. JARED L. COHON

Dr. Jared L. Cohon |  | Director                                                                      |  | March 1, 2004
|                                           |  |                                                                               |  |              
|/s/ THOMAS J. GILL

Thomas J. Gill         |  | Director                                                                      |  | March 1, 2004
|                                           |  |                                                                               |  |              
|/s/ RAYMOND J. LANE

Raymond J. Lane       |  | Director                                                                      |  | March 1, 2004
|                                           |  |                                                                               |  |              
|/s/ THOMAS J. MEREDITH

Thomas J. Meredith |  | Director                                                                      |  | March 1, 2004
|                                           |  |                                                                               |  |              
|/s/ KARL E. NEWKIRK

Karl E. Newkirk       |  | Director                                                                      |  | March 1, 2004

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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                    
|10.3(d) |  | Sixth 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 28, 2003.  
|        |  |                                                                                                                                                                                                                                    
|10.3(e) |  | Seventh 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 December 18, 2003.
|        |  |                                                                                                                                                                                                                                    
|23.1    |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                    
|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 Chief
Financial Officer Relating to a Periodic Report Containing
Financial Statements                                                                                             

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REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders
of FreeMarkets, Inc. and Subsidiaries:

Our audits of the consolidated financial statements referred to in our
report dated February 6, 2004 appearing in this Form 10-K also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
February 6, 2004

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SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

|                                   |                              |          |              |            |            |          |             |            |            |  |        |           |        |  |            |            |   |  |   |            | 
|---------------------------------- | ---------------------------- | -------- | ------------ | ---------- | ---------- | -------- | ----------- | ---------- | ---------- |  | ------ | --------- | ------ |  | ---------- | ---------- | - |  | - | ---------- | 
|Column A                           |                              | Column B |              | Column C   |            | Column D |             | Column E  
|                                   |                              |          |              |            |            |          |             |           
|                                   |                              |          |              |            |            |          | Additions   |            |            |  |        |           |        |  |           
|                                   |                              |          |              |            |            |          |             |            |            |  |        |           |        |  |           
|                                   |                              |          | Balance at   |            |            |          |             |            | Charged to |  |        |           |        |  | Balance at
|                                   |                              |          | Beginning of |            | Charged to |          | Other       |            |            |  |        |           | End of
|                                   |                              |          | Period       |            | Expense    |          | Accounts(1) |            | Deductions |  | Period
|                                   |                              |          |              |            |            |          |             |            |            |  |       
|Allowance for doubtful
accounts:   |                              |          |              |            |            |          |             |            |            |  |        |           |        |  |            |            |   |  |   |           
|                                   | Year ended December 31, 2003 |          | $            | 1,915,000  |            |          | $           | 1,501,000  |            |  | $      |          |        |  | $          | (1,296,000 | ) |  | $ | 2,120,000  | 
|                                   | Year ended December 31, 2002 |          |              | 1,015,000  |            |          |             | 1,555,000  |            |  |        |          |        |  |            | (655,000   | ) |  |   | 1,915,000  | 
|                                   | Year ended December 31, 2001 |          |              | 903,000    |            |          |             | 3,123,000  |            |  |        |          |        |  |            | (3,011,000 | ) |  |   | 1,015,000  | 
|Allowance for deferred tax
assets: |                              |          |              |            |            |          |             |            |            |  |        |           |        |  |            |            |   |  |   |           
|                                   | Year ended December 31, 2003 |          |              | 88,299,000 |            |          |             | 3,825,000  |            |  |        | 1,094,000 |        |  |            |           |   |  |   | 93,218,000 | 
|                                   | Year ended December 31, 2002 |          |              | 76,490,000 |            |          |             | 10,173,000 |            |  |        | 1,636,000 |        |  |            |           |   |  |   | 88,299,000 | 
|                                   | Year ended December 31, 2001 |          |              | 38,271,000 |            |          |             | 36,459,000 |            |  |        | 1,760,000 |        |  |            |           |   |  |   | 76,490,000 | 



| |     |                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Represents the valuation allowance related to
the exercise of non-qualified stock options which is recorded in
stockholders equity.

59