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

                                  FORM 10-K/A
                                AMENDMENT NO. 2

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

(Mark One)

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

     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

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

    FOR THE TRANSITION PERIOD FROM               TO

                        COMMISSION FILE NUMBER 000-27913

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

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

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

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

                    Securities registered pursuant to Section 12(b) of the Act:
               Title of Each Class                    Name of Each Exchange on Which Registered
                -----------------                    ------------------------------------------
                      NONE                                         NOT APPLICABLE
</TABLE>

          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]

    The aggregate market value of voting common stock held by non-affiliates of
the registrant as of March 1, 2001 (based upon the last reported sale price of
such stock as reported by The Nasdaq National Market on such date) was
$635,207,401 (calculated by excluding shares owned beneficially by directors and
executive officers as a group from total outstanding shares solely for the
purpose of this response).

    The number of shares of the registrant's common stock outstanding as of the
close of business on March 1, 2001 was 39,070,187.

                      DOCUMENTS INCORPORATED BY REFERENCE

    None.

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<PAGE>   2

                               INTRODUCTORY NOTE

     For purposes of this Form 10-K/A (Amendment No. 2), we have amended and
restated in their entirety Parts I, II and IV of the Form 10-K for the year
ended December 31, 2000 that was filed on February 23, 2001 (the "Original
10-K"). Amendment No. 2 reflects the reissuance of our consolidated financial
statements as of December 31, 2000 and for the year then ended and comments of
the staff of the Securities and Exchange Commission on the Original 10-K during
its review of our Registration Statement on Form S-4 filed in connection with
our proposed acquisition of Adexa, Inc. Form 10-K/A (Amendment No. 1) was filed
on April 30, 2001 to provide on a timely basis the information required by Part
III of Form 10-K.
<PAGE>   3

                                     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", as
well as to our other filings with the Securities and Exchange Commission (the
"SEC") and to the factors discussed elsewhere in this Form 10-K for a
description of some of the risk factors that could cause our results to differ
materially from our forward-looking statements.

OVERVIEW

     FreeMarkets creates business-to-business online auctions and provides
electronic commerce technology and services to buyers of industrial parts, raw
materials, commodities and services. We have created more than 9,200 online
auctions--which we call "markets"--for more than $14 billion worth of goods and
services for our customers. We estimate, based upon the difference between the
prices that our customers have historically paid and the lowest prices that are
identified in our auctions, that our auctions have resulted in potential savings
of over $2.7 billion for our customers.

     We combine our proprietary technology platform with an in-depth knowledge
of the supply markets for direct materials, which are the industrial parts and
raw materials that are incorporated into finished products by manufacturing
companies. Because direct materials are often custom-made to buyers'
specifications, there are no catalogs or price lists to enable buyers to make
price comparisons. The purchasing process is further complicated by the
fragmentation of many supply markets and the importance of product quality in
supplier selection. Because this complexity leads to market inefficiencies, we
think that buyers of direct materials often pay prices that are too high.

     Our online markets help buyers of direct materials obtain lower prices and
make better purchasing decisions. In a FreeMarkets online market, suppliers from
around the world can submit bids in a real-time, interactive competition that is
designed to be fair to all participants. We offer customers our FullSource
solution, in which we help the customer to identify and screen suppliers and to
assemble a request for quotation that provides detailed, clear and consistent
information for suppliers to use as a basis for their competitive bids. We also
offer our QuickSource solution, which enables customers to use our technology to
run their own online markets. In addition, we operate the FreeMarkets Asset
Exchange for buyers and sellers of surplus assets and inventory.

RECENT EVENTS

     On February 7, 2001, we entered into a definitive merger agreement to
acquire Adexa, Inc., a leading provider of software products that enable
collaborative commerce. Under the merger agreement, we will issue up to
17,250,000 shares of our common stock and options in exchange for all
outstanding equity interests of Adexa. We expect the merger to close in the
second quarter of 2001. We have filed with the SEC a Registration Statement on
Form S-4 relating to the issuance of FreeMarkets common stock in connection with
the proposed merger. Please refer to the risk factors set forth in this Form
10-K and in the Form S-4 for risks that could cause the merger not to occur or
that could cause the benefits that we expect to gain from the merger not to be
realized. As part of its review of our Form S-4, the staff of the SEC raised
questions with respect to the classification of certain revenues in our
financial statements included in the Original 10-K. Following discussions with
the staff of the SEC, we have reissued our consolidated financial statements as
of December 31, 2000 and for the year then ended. This reissuance relates to the
classification of the fees we earn under a contract with Visteon Corporation
("Visteon") pursuant to which we provide access to our
<PAGE>   4

eMarketplace and perform services for Visteon and Visteon pays us fixed monthly
fees plus variable fees if specified volume thresholds are exceeded. Because we
granted a warrant to Visteon which was valued at $95.5 million at the time we
entered into the service contract, we are required to exclude from our revenues
the fees we earn from Visteon, and to allocate those fees as payment for the
warrant. A description of the reclassification of the fees we earn from Visteon
is included in Note 3 of the Notes to Consolidated Financial Statements.

     In early April 2001, we closed our Austin, Texas office, formerly the
headquarters of our subsidiary iMark.com, Inc. which was acquired in March 2000,
and relocated our asset recovery division to Pittsburgh, Pennsylvania. As a
result of the closing of the Austin office, we will record a restructuring
charge of approximately $3 million to $4 million in the second quarter of 2001
relating to lease termination costs, employee severance costs and the non-cash
write-off of assets.

INDUSTRY BACKGROUND

  GROWTH OF BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE

     The Internet is one of the fastest-growing means of communication, globally
reaching consumers and businesses. As the number of Internet users has grown,
businesses have increasingly recognized the power of the Internet to streamline
complex processes, lower costs and improve efficiency. Forrester Research has
projected that the market for business-to-business electronic commerce will grow
to $2.7 trillion in 2004, and that 53% of this Internet trade will flow through
online marketplaces. As businesses increasingly use the Internet to communicate
with their trading partners, the demand for online marketplaces and
Internet-based procurement solutions should increase. International Data
Corporation has projected that the market for Internet-based electronic
procurement applications will grow from $1.7 billion in 2000 to almost $9
billion in 2004, and Forrester projects that $1.4 trillion will flow through
online markets in 2004.

     Many Internet-based electronic procurement applications and online markets
have focused on automating the process for the purchase of standard supplies
that are used to operate a business, such as office supplies. While these
applications have proven useful, they do not effectively address the needs of
manufacturers who purchase direct materials, which are the industrial parts, raw
materials and commodities that are incorporated into finished products.

  INEFFICIENCIES OF SUPPLY MARKETS FOR DIRECT MATERIALS

     Based on industry research and government statistics, we estimate that
manufacturers worldwide purchase approximately $5 trillion of direct materials
each year. Due to inefficiencies in the markets that supply these materials, we
think that buyers often pay prices that are too high or have difficulties
identifying appropriate suppliers. We believe that these inefficiencies result
in part from the following factors:

     - CUSTOM-MADE PRODUCTS HAVE NO STANDARD PRICES.  Direct materials are often
       custom-made or adapted to a buyer's specifications. Because these
       materials are typically not standardized, they ordinarily cannot be
       ordered from catalogs at list prices. Without catalogs or list prices,
       buyers cannot easily obtain comparative price information.

     - QUALITY CAN BE AS IMPORTANT AS PRICE.  Because manufacturers use direct
       materials as components in finished products, quality is critical. There
       is often little standardized information on direct material quality. As a
       result, when selecting suppliers, buyers frequently must spend
       significant effort compiling their own information to compare quality as
       well as price.

     - SUPPLY MARKETS ARE FRAGMENTED.  Supply markets for direct materials often
       contain hundreds of potential suppliers. This fragmentation makes it
       difficult for buyers to understand the entire supply market for the
       products they are buying and to evaluate and select potential new
       suppliers.

     The need for customization, the importance of quality and the fragmentation
of supply markets complicate the process by which buyers purchase direct
materials. This complexity often leads buyers to rely on suppliers with whom
they have dealt in the past, making it difficult for new suppliers to compete
for

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business. Because these factors limit competition among suppliers, buyers may
pay higher prices or obtain lower quality than they would in a more efficient
market with better information and more readily available alternative sources of
supply.

     We believe that neither software applications or other technology, nor
services alone can provide an adequate solution for buyers of direct materials.
Rather, we think that the creation of an efficient market for these materials
requires a solution that combines Internet technology with information and
services that satisfy buyers' needs.

THE FREEMARKETS SOLUTION

     We combine our proprietary Internet technology platform with our in-depth
knowledge of supply markets to help industrial buyers obtain lower prices and
make better purchasing decisions. In our marketplace, multiple suppliers from
around the world can submit bids for a buyer's purchase order in a real-time,
interactive competition. Our markets, in contrast to those designed for sellers,
feature "downward price" dynamic bidding in which suppliers continue to lower
their prices until the market is closed. In our FullSource and DirectSource
offerings, we work with our customers, using our proprietary FreeMarkets Desktop
and BidWare technology, to identify and screen suppliers and to assemble a
request for quotation that provides detailed, clear and consistent information
for suppliers to use as a basis for their competitive bids. This service, which
we call "market making," creates a custom market for the goods or services being
purchased by our customers. In our QuickSource offering, which is appropriate
for less complex sourcing, our customers create their own markets, using our
hosted application but not our market making services. Our solution provides:

     - SUBSTANTIAL SAVINGS.  Our online markets can deliver substantial savings
       to our customers. Depending upon the nature of the direct materials or
       services being bid, savings typically range from a few percentage points
       on purchases of commodities to more than 25% on purchases of custom
       industrial components, with even greater savings at times. Customers
       often begin to save with the first market we create.

     - ROBUST INTERACTIVE TECHNOLOGY.  Our BidWare Internet technology
       facilitates dynamic competitive bidding by enabling suppliers to submit
       bids in real time and to view competing bids within seconds after their
       submission. Our FreeMarkets Desktop Internet technology facilitates
       collaboration between our customers and their trading partners. Our
       technology is flexible and adaptable to our customers' needs. We can
       easily configure our markets in many different formats to address the
       characteristics of a specific industrial part or commodity and to achieve
       the particular objectives of each of our customers. In addition, we
       engage in a continuous process of improving our technology by adding new
       functions and features that we develop through our marketplace
       experience.

     - TAILORED APPROACH TO CUSTOMERS' NEEDS.  Our FullSource and DirectSource
       offerings are tailored to meet the needs of each customer. Our customers
       are typically large corporations that purchase a wide variety of
       industrial parts, raw materials, commodities and services. Each customer
       has its own unique organizational structure, approach to purchasing and
       purchasing objectives. We work with each customer to identify the
       portions of their purchases that are best suited for our solutions, and
       we design markets that meet their needs.

     - SELF-SERVICE QUICKSOURCE OFFERING FOR LESS COMPLEX SOURCING. Our
       QuickSource hosted application enables customers who do not require
       market making services to take advantage of our technology and platform
       to run their own markets. This application is appropriate for less
       complex sourcing and, together with our FullSource and DirectSource
       offerings, enables us to address the entire range of our customers'
       sourcing needs.

     - IN-DEPTH KNOWLEDGE OF SUPPLY MARKETS.  We develop and manage specialized
       information about many different product categories. Each time we create
       a market, we add to the knowledge we can apply to our business. We
       maintain a database of tens of thousands of potential suppliers, with
       information about their manufacturing processes, quality assurance
       practices, market focus and

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       facilities. This in-depth knowledge enables us to provide our customers
       with market information that they cannot easily generate themselves or
       obtain from other sources.

     - MARKET INTEGRITY.  We have designed our marketplace to enable our
       customers to evaluate competing suppliers on the basis of price, quality
       and performance in a process that is intended to be fair to all
       participating suppliers. The request for quotation that is distributed to
       potential suppliers provides detailed and clear specifications, so that
       all suppliers who participate in our marketplace have consistent
       information to use as a basis for their bids. Buyers and suppliers who
       participate in our marketplace agree in advance to a set of rules which
       are designed to ensure the integrity of the markets that we create. These
       rules give participating suppliers the confidence to submit their best
       bids.

THE FREEMARKETS STRATEGY

     We seek to be the world's leading provider of business-to-business online
markets and electronic commerce technology, software and services that enable
customers to source and operate their supply chains for direct materials. The
key elements of our strategy are:

     - EXTEND OUR CUSTOMER BASE.  We intend to extend our customer base in our
       target market of Global 2000 corporations and other large enterprises,
       including government agencies.

     - EXTEND INTO SUPPLY CHAIN COLLABORATION AND OPTIMIZATION.  We recently
       announced that we have signed a definitive agreement to acquire Adexa,
       Inc., a leading provider of software products for supply chain
       collaboration and optimization. We believe that with this acquisition, we
       will provide customers with the ability to source and operate their
       supply chains for direct materials, in their own private marketplaces, in
       exchanges with other industry participants, or using our marketplace.

     - ADD DOMAIN KNOWLEDGE IN ADDITIONAL PRODUCT CATEGORIES.  We believe that
       our domain knowledge of industrial product categories, called "supply
       verticals," is one of the factors that differentiates us from other
       participants in the business-to-business electronic commerce industry. We
       intend to continue to add domain knowledge in additional product
       categories where our online markets can generate savings for buyers. We
       plan to identify these markets by working with our existing and
       prospective customers to determine additional direct material categories
       that would be appropriate for our solution and by hiring personnel with
       expertise in a variety of supply verticals.

     - EXPAND OUR PRODUCT OFFERINGS.  We have recently announced our QuickSource
       hosted application that enables our customers to create their own
       markets, and we intend to expand the sales of our new QuickSource product
       and other hosted applications. We also run the FreeMarkets Asset Recovery
       Marketplace for buyers and sellers of surplus equipment and inventory.

     - GROW INTERNATIONAL PRESENCE.  We maintain offices in 12 countries outside
       the United States. We plan to continue to expand in global markets to
       better serve multinational enterprises. We have served buyers in the
       United States, Europe, Asia, Australia and South America with over 9,300
       suppliers from more than 55 countries participating in our online
       markets. We believe that we can assist buyers in identifying potential
       suppliers worldwide and that our marketplace will continue to be
       attractive to buyers based outside the United States.

     - FOSTER A CULTURE OF EXCELLENCE AND CUSTOMER SERVICE.  We intend to
       continue to employ rigorous recruiting, training and evaluation practices
       to help us attract and retain employees who dedicate themselves to
       delivering outstanding results to our customers. Since our inception, we
       have emphasized the creation of an environment of excellence and customer
       service. We believe that our commitment to excellence has led and will
       continue to lead to new customer referrals from satisfied buyers and
       suppliers who have used our marketplace.

     - ADD NEW PROPRIETARY TECHNOLOGY.  We believe that our proprietary sourcing
       technology, on which we have applied for more than 25 patents, has
       functions and features that are unmatched in the business-to-business
       electronic commerce industry. We intend to continue to develop additional
       proprietary technology and to seek appropriate patent protection for our
       technology.

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     - GROW THROUGH STRATEGIC RELATIONSHIPS AND ACQUISITIONS.  We intend to
       pursue opportunities to expand our business through strategic
       relationships and acquisitions, as well as through internal development.

THE FREEMARKETS MARKET MAKING PROCESS

     We help our customers obtain lower prices and make better purchasing
decisions through a combination of our proprietary technology, sourcing
information, domain knowledge and services. In our FullSource offering and, to a
limited extent, our DirectSource offering, we provide "market making" services
that create a custom market for the direct materials, commodities or services
being purchased through our marketplace. Our market making services are
delivered through our FreeMarkets Desktop technology platform, which facilitates
collaboration between our customers and their trading partners. Market making
consists of the following steps:

                                  arrow chart

     IDENTIFY POTENTIAL SAVINGS.  We work with our customers to identify which
purchases seem best suited to our market making process. Although our
marketplace generates savings on many types of products, the potential savings
are particularly dramatic for direct materials that are custom-made to a buyer's
specifications and available from many different suppliers. Examples include
injection molded plastic components, metal fabrications, commercial machinings,
printed circuit boards, fasteners and corrugated packaging. Other types of
products, including commodities such as chemicals and coal, can also be
appropriate for our process because market conditions are volatile and purchase
prices may change with each transaction.

     PREPARE REQUEST FOR QUOTATION.  Once a suitable purchase has been
identified, we work with our customers to prepare a request for quotation. The
request for quotation, or RFQ, is our customer's specification of the materials
to be purchased. This specification is sent to selected suppliers to help them
prepare their bids. Our technology automatically matches buyer part
specifications with supplier capabilities, facilitating the preparation of the
RFQ and the selection of suppliers. Because many direct materials must be
custom-made to a buyer's specifications, it is essential for the request for
quotation to specify precisely all of our customer's requirements, including the
applicable technical characteristics, quality and logistics requirements and
commercial terms. A market typically includes components with different
characteristics or delivery locations, so we group components into lots with the
goal of creating meaningful competition in each lot.

     SELECT POTENTIAL SUPPLIERS AND DISTRIBUTE REQUEST FOR QUOTATION.  While the
request for quotation is being prepared, the supplier selection process begins.
We start with a target list of suppliers that includes those known to our
customers and others we identify from our supplier database of tens of thousands
of suppliers. After a detailed screening process, our customer selects a list of
potential suppliers. Because most industrial purchases are made from a select
group of potential suppliers, our online markets are private, and only those
suppliers that our customer ultimately invites may participate. Privacy is
important because the information contained in the request for quotation is
highly confidential and our customer will award a purchase order only to a
qualified supplier. Once our customer has selected potential suppliers, we
provide these suppliers with the request for quotation to enable them to prepare
for the competitive bidding. We also train suppliers in the use of our software.

     CONDUCT ONLINE MARKET.  After potential suppliers have been selected and
trained, we conduct an online market. During the bidding, suppliers remain
anonymous to one another but can see competing price bids in real time, while
our customer can see both the identity and current bid of each supplier. A
market typically lasts for one to three hours. The activity is fast-paced, with
suppliers generally submitting bids every few minutes, and often more frequently
as the closing time for each lot nears. Our Market Operations Centers in
Pittsburgh and Brussels provide continuous support to our customers and
suppliers throughout the process. We monitor performance, send real-time
messages to participants and strive to ensure that all bidders can
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participate effectively. We believe that our active involvement makes our
marketplace more reliable. We can support participants in more than 30 different
languages. We consider this to be a critical skill in helping customers to buy
from suppliers around the world.

     IMPLEMENT RESULTS.  After the online market has been completed, we assist
our customers in analyzing and implementing market results so that purchase
orders can be awarded to the suppliers providing the best overall value. In some
situations, our customers can make immediate award decisions. In other
instances, our customers may perform additional analyses and due diligence
before making an award. Because awards may be based not only on price, but also
on factors such as quality and delivery capabilities, the low bidder does not
always win. Our customers ultimately make the final award decisions.

PRODUCT CATEGORIES

     We create markets for our customers in a wide variety of product
categories, ranging from commodities to custom-engineered components. The number
of product categories in which we have conducted markets grew to more than 165
by the end of December 31, 2000. The following list includes some of the product
categories in which we have had the most experience:

<TABLE>
<S>                     <C>                     <C>                     <C>
Ball bearings           Corrugated packaging    Injection molded        Pallets
Chemicals               Die castings            plastics                Printed circuit boards
Coal                    Diesel fuel             Metal fabrications      Service center metals
Commercial machinings   Fasteners               Metal stampings         Sugar
Computer monitors       Hotel services          Molded rubber           Transformers
                                                Motor freight
</TABLE>

     Most industrial buyers make purchases in a range of product categories, so
we believe it is important that we address a comparable range. We typically
conduct multiple markets in each product category, so we gain knowledge and
improve productivity over time.

CUSTOMERS

     Our customers are among the world's largest buyers of industrial parts, raw
materials, commodities and services. The following companies are among our
current customers:

<TABLE>
<S>                             <C>                             <C>
Alcoa Inc.                      Diebold, Incorporated           Norsk Hydro ASA
Allegheny Technologies          Eaton Corporation               Pilkington, plc
  Incorporated                  Emerson Electric Co.            The Quaker Oats Company
American Airlines, Inc.         FirstEnergy Corp.               Raytheon Company
Bayer AG                        FMC Corporation                 Schering-Plough Corporation
Bechtel Corporation             Giant Eagle, Inc.               Singapore Technologies
BP Amoco p.l.c.                 Glaxo SmithKline plc              Engineering Ltd.
Commonwealth of Pennsylvania    H.J. Heinz Company              SPX Corporation
Dana Corporation                International Truck and Engine  United Technologies
Deere & Company                   Corporation                   Corporation
Delphi Automotive Systems       Mayne Nickless Limited          Valeo
  Corporation                                                   Visteon Corporation
</TABLE>

     We provide services to our customers under agreements that range from a few
months to five years. Each of the customers listed above is party to an
agreement with us containing a term of not less than 12 months. Many of these
agreements are cancelable by our customers on minimal notice and without
substantial penalties. Our agreements typically provide us with revenues from
fixed monthly fees. Some of our agreements also include performance incentive
payments that are contingent upon our customer achieving specific market volume
and/or savings thresholds. We never take title to or possession of any of the
products purchased through our marketplace. We also do not oversee delivery of
or payment for these products. We serve our customers from our offices in the
United States and in 12 foreign countries. Many of our customers are multi
national companies. Over 90% of our revenues plus Visteon fees in 2000, 1999 and
1998 were derived from customers whose headquarters are located within the
United States.

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SALES AND MARKETING

     We sell our services through our direct sales organization. As of December
31, 2000, our direct sales force consisted of more than 50 sales professionals,
organized along buyer industry lines. We plan to expand our direct sales force
and the number of buyer industry sectors for which we have specialists on our
staff.

     We typically target our sales efforts at senior purchasing executives,
chief technology officers, and other senior executives within a buying
organization. When a prospective customer is interested in working with us, we
analyze which portions of its direct material purchases are best suited to our
marketplace. Throughout this analysis, we work with the prospective customer to
negotiate terms of an agreement.

     New customers often enter into short-term agreements with us before making
a longer-term commitment. Because our technology need not be integrated with the
customer's existing information technology infrastructure, short-term agreements
can quickly result in savings for our customer. Our short-term agreements
typically last three to six months, during which time we prepare and conduct a
range of markets. Our goal through this process is to demonstrate our capability
to provide savings and to obtain a longer-term agreement with the customer.

     Our marketing efforts focus on general communications and on obtaining
referrals from our existing customers. We participate in trade conferences and
purchasing industry forums, and advertise in major airports and business
publications. We intend to continue to make advertising and marketing
expenditures in an effort to become better known in our target markets. These
expenditures will cover the addition of sales, marketing, product management and
business development personnel, advertising in professional journals and general
business and trade media, media relations, presence at purchasing and technology
trade conferences, and continuing improvements to our website.

TECHNOLOGY AND OPERATIONS

     We have built our proprietary technology to create a highly-interactive
marketplace tailored to the needs of industrial purchasers. Our Internet-based
BidWare technology provides an easy-to-use graphical interface that suppliers
use to submit bids and that our customers use to watch the progress of our
markets. Suppliers participate from their own offices, where key decision makers
submit bids. Our BidWare technology provides nearly instantaneous response,
displaying these bids to all users within seconds of submission. A truly dynamic
competition results, as buyers watch prices decrease before their eyes.

     Our BidWare technology is designed for high-value online bidding involving
complex market conditions. This Internet-based technology supports global,
real-time interactions and has driven more than $14 billion in global
business-to-business commerce. Our BidWare technology supports a significant
number of market formats, enabling global suppliers to bid in multiple
currencies, across multiple countries for multi-year contracts, all over the
Internet.

     Our FreeMarkets Desktop technology consists of a suite of sourcing tools
that, together with our BidWare technology, enable our customers, in a secure,
password-protected environment, to create complex RFQs, publish specifications,
select and collaborate with global suppliers, configure a market, negotiate
dynamically in real time with suppliers, and award business to suppliers.

     We operate Market Operations Centers in Pittsburgh and Brussels to ensure
that our marketplace is actively managed and runs smoothly. We strive to make
our marketplace extremely reliable, both through our operations methodology and
the quality of our technology. Our technology architecture contains many
features to monitor and control our marketplace so that our Market Operations
Centers can quickly respond in the event of technical or other difficulties. In
addition, the staff in our Market Operations Centers actively support bidders
before and during markets, helping to further ensure the reliability of our
marketplace. Although we have taken extensive measures to ensure the reliability
of our marketplace, we cannot guarantee that we will not have technical
interruptions or failures in the future.

     Our BidWare technology includes: real-time price feedback, which allows
bidders to see market dynamics at work; an overtime feature that extends the
market bid time in highly competitive situations;

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continuous remote connections with bidders worldwide; and advanced security
features to protect the confidentiality of online bids. Our technology also
incorporates a wide range of bidding features and market formats that we
developed to address specific needs of industrial purchasers. Examples of the
types of markets we can conduct using our BidWare technology include:

     - "transformation bidding", where our customers can make direct price
       comparisons of similar products with unique attributes (such as coal from
       different mines);

     - "multi-currency bidding", where our customers and suppliers can choose to
       conduct bidding in the currency of their choice and to monitor bids in
       multiple currencies;

     - "index bidding", where our customers can conduct markets for commodities
       characterized by volatile pricing, against known indices (such as
       agricultural commodities); and

     - "net present value bidding", where our customers can evaluate proposals
       that have varying prices over time (such as materials for which suppliers
       bid decreasing costs over time to reflect anticipated productivity
       improvements).

     We spent $4.9 million on research and development in 1999 and $19.1 million
in 2000. We plan to continue to increase our research and development
expenditures to develop new technology and add features to our existing
technology.

COMPETITION

     A number of companies provide services or products to the market for
business-to-business electronic commerce. Competition in this market is rapidly
evolving and intense, and we expect competition to further 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 electronic commerce technology extending their offerings to
       include services or technology similar to ours;

     - well-financed entrepreneurial start-ups that offer similar products and
       services or products and services perceived by a customer to be similar;

     - business-to-business exchanges or private marketplaces that are
       established by industrial companies, acting either in a consortium or
       unilaterally, which are designed to provide electronic procurement
       solutions;

     - professional service and consulting firms and others offering services
       similar to ours; and

     - providers of stand-alone software products that make available to buyers
       technology for conducting online markets.

     Our online marketplace is one of many alternative approaches to purchasing
that buyers may consider. Many of our current and potential competitors are
larger and more established, and have significantly greater resources than we
do. As a result, some of our current or potential competitors may be able to
commit more resources to marketing and promotional campaigns, adopt more
aggressive pricing policies and devote more resources to technology development.
In order to respond to changes within this competitive environment, we may from
time to time make pricing, service, marketing or other strategic decisions that
could adversely affect our operating results. In addition, competitors may
introduce products or services that appear to be the same as ours, despite
actual differences. In such an environment, we face the risk that customers will
confuse our services with those of our competitors or choose a competitor with
greater resources. We also face the risk that customers may attain poor results
with other products or services and lose interest in doing business with us.
General economic conditions may also adversely affect demand for our services.
We may not be able to keep our current customers or secure new ones in light of
these issues.

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INTELLECTUAL PROPERTY

     We regard the protection of our intellectual property rights to be critical
to our success. We rely or expect to rely on a combination of patent, copyright,
trademark, service mark and trade secret restrictions and contractual provisions
to protect our intellectual property rights. We require employees and
independent contractors to enter into confidentiality and invention assignment
agreements, and require some of our employees to enter into non-competition
agreements. We also have non-disclosure agreements with our customers and
suppliers who participate in our marketplace. We do not sell our software to our
customers or to suppliers, but rather license it for specified purposes. The
contractual provisions and the other steps we have taken to protect our
intellectual property may not prevent misappropriation of our technology or
deter third parties from developing similar or competing technologies.

     BidWare, BidServer and FreeMarkets are registered trademarks of FreeMarkets
in the United States, and BidWare is a registered trademark of FreeMarkets in
Hong Kong and the European Community. In addition, we own a registration for the
FreeMarkets trademark in the European Community. We have applied to register the
FreeMarkets and BidWare trademarks in other jurisdictions, including Japan and
Singapore. We have also applied for United States and foreign registration for
our FreeMarkets logo and several other marks associated with our business.

     We have filed more than 25 patent applications in the United States with
respect to proprietary features of our technology that we currently use or
intend to use in the future. We cannot assure you that these patents will be
issued, or that if they are issued, these patents will not be successfully
challenged by others or invalidated or will adequately protect our technology or
processes or otherwise result in commercial advantages to us.

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

     There is also significant uncertainty regarding the applicability to the
Internet of existing laws regarding matters such as property ownership,
copyrights, patents and other intellectual property rights. The vast majority of
these laws were adopted prior to the advent of the Internet and, as a result, do
not contemplate or address the unique issues of the Internet and related
technologies.

GOVERNMENT REGULATION

     As with 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 applicable to online commerce,
other than regulations applicable to businesses in general. However, the
Internet has rapidly emerged as a commerce medium, and governmental agencies
have not yet been able to adapt existing regulations to its use. Future laws,
regulations and court decisions may affect the Internet or other online
services, covering issues such as user pricing, user privacy, freedom of
expression, access charges, taxation, content and quality of products and
services, advertising, intellectual property rights and information security. In
addition, because our services are offered worldwide, and we facilitate sales of
goods to customers worldwide, foreign jurisdictions may claim that we are
required to comply with their laws. Any future regulation may have a negative
impact on our business.

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

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<PAGE>   12

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

EMPLOYEES

     As of December 31, 2000, we had 968 employees worldwide, including 516 in
market making, 112 in research and development, 133 in sales and marketing, 59
in technical operations and 148 in executive management and administration,
human resources, legal, finance and facilities management. 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."

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     Our quarterly operating results have varied significantly in the past, are
prone to significant fluctuations and will likely vary significantly in the
future. For example, our revenues plus Visteon fees have grown at an average
sequential rate of 46% over the five quarters commencing October 1, 1999 and
ending December 31, 2000. Our cost of revenues as a percent of revenues plus
Visteon fees has decreased from 61% in the fourth quarter of 1999 to 50% in the
fourth quarter of 2000. In addition, we reported a net loss of $0.43 per share
in the fourth quarter of 1999 and a net loss of $1.17 per share in the fourth
quarter of 2000. We believe that quarter-to-quarter comparisons of our results
of operations are not meaningful, and you should not rely upon them as
indicators of future performance. Our operating results will likely fall below
the expectations of securities analysts or investors in some future quarter or
quarters. As a result, the price of our common stock may fall.

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

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

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

     Furthermore, in recent quarters, many companies have announced their
intentions to establish their own business-to-business industry exchanges or
private marketplaces. Our current customers or prospective customers may also
establish their own industry exchanges or private marketplaces. These exchanges
or marketplaces may provide online market functionality and other services
similar to ours and may diminish the need for our services. While we do not know
the effect that these exchanges and marketplaces may have on the market for our
online market services, it is possible that the existence of these exchanges and

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marketplaces, or even the anticipated existence of planned exchanges and
marketplaces, may result in our losing customers and revenue and may impair our
ability to grow our business.

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 PRICE TO FALL

     We depend on United Technologies Corporation ("United Technologies") and
Visteon for a material portion of our revenues and fees. In October 2000, we
entered into a three-year contract extension with United Technologies, but this
agreement may be terminated at any time prior to its expiration by United
Technologies on 30 days' notice and without substantial penalty. In April 2000,
we entered into a five-year agreement with Visteon that provides for a fixed
monthly payment stream larger than any other current customer contract. Although
this agreement is not cancelable, it may be terminated, subject to cure periods,
in the event of a breach. Any termination of our agreements with United
Technologies or Visteon, whether or not permitted by the terms of those
agreements, would diminish our revenues and operating results. Revenues from
United Technologies were $9.0 million in 2000 and $7.0 million in 1999. Fees
from Visteon were $7.9 million in 2000.

     In January 2000, General Motors Corporation ("General Motors"), which
contributed $3.1 million of revenues in 1999, notified us that it was exercising
its right to terminate its agreement. In the two days following our announcement
of the termination of the General Motors contract, our stock price decreased by
approximately 28%. The loss of any other significant customers could cause a
similar decrease in our stock price.

THE ACQUISITION OF ADEXA, INC. INVOLVES A SUBSTANTIAL DEGREE OF RISK; WE CANNOT
ASSURE YOU THAT FREEMARKETS WILL REALIZE ANY OF THE EXPECTED BENEFITS OF THE
ACQUISITION

     On February 7, 2001, we entered into an agreement to acquire Adexa, Inc. We
expect the acquisition of Adexa to be completed in the second quarter of 2001.

     The acquisition of Adexa involves a substantial degree of risk. With the
acquisition of Adexa, FreeMarkets is entering into the market for supply chain
management and collaboration software. We have not previously had experience in
this market. We cannot assure you that any of the benefits we expect from the
acquisition will be realized. Achieving the benefits of the acquisition will
depend in part on the integration of the technology, operations and personnel of
FreeMarkets and Adexa in a timely and efficient manner. The failure to do so
could result in the loss of key personnel and have a material adverse effect on
our business, financial condition and operating results.

     The market for supply chain management and collaboration software is
rapidly evolving and intensely competitive. Among the actual and potential
competitors in that market are enterprise application vendors including, among
others, i2 Technologies, Inc., Oracle Corporation and SAP Corporation, as well
as electronic exchange infrastructure providers such as Ariba, Inc. and Commerce
One, Inc. Such competitors are larger and more established and have
significantly greater resources than we do. We cannot assure you that
FreeMarkets will be able to compete successfully in such an environment.

     Our ability to integrate the combined businesses and to compete may be
adversely affected by the slowdown in the economy. Purchasing decisions for our
product offerings may be deferred or postponed as potential customers evaluate
their budgets in light of current economic conditions. This would lead to longer
sales cycles and result in lower revenues than we had anticipated.

WE HAVE ACQUIRED AND MAY IN THE FUTURE ACQUIRE COMPLEMENTARY BUSINESSES OR
TECHNOLOGIES

     In 2000 we acquired iMark.com, Inc., Surplus Record, Inc. and SR Auction,
Inc. On February 7, 2001, we entered into an agreement to acquire Adexa, Inc. 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 integration of any acquired

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<PAGE>   14

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 never 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, assume contingent liabilities or create additional expenses related to
amortizing goodwill and other intangible assets, any of which might harm our
financial results and cause our stock price to decline. Any financing that we
might need for acquisitions may only be available to us on terms that restrict
our business or that impose additional costs that reduce our operating results.

     The net book value of goodwill on our consolidated balance sheet as of
December 31, 2000 was $263.5 million. It is our policy to assess the potential
impairment of long-lived assets, such as goodwill, when events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. For example, we may decide to reallocate resources based on
potential changes in our business strategy. If such strategic decisions are made
and we reduce our commitment level to iMark.com, Inc., we would need to evaluate
the goodwill related to iMark.com, Inc. for impairment. The recognition of an
impairment loss could have a material adverse effect on our operating results.

WE USE SIGNIFICANTLY MORE CASH THAN WE GENERATE

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

WE ANTICIPATE FUTURE LOSSES

     We experienced losses of $0.9 million, $1.4 million and $1.1 million in
1995, 1996 and 1997, respectively. We achieved a modest profit in 1998, but
incurred losses of $21.8 million and $156.4 million in 1999 and 2000,
respectively, as a result of our efforts to invest in the actual and anticipated
growth of our business. Our accumulated losses to date are $181.4 million. Our
profitability will depend on whether we can 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 online market 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 online market
services to buyers in those markets, or attracting willing suppliers in other
markets, either of which will reduce our revenues and operating results.

OUR SPENDING ON INCREASED CAPACITY PRECEDES OUR RECEIPT OF REVENUES; THIS COULD
CAUSE THE PERCENTAGE OF OUR COST OF REVENUES TO REVENUES PLUS VISTEON FEES TO BE
VOLATILE

     We must hire personnel, acquire equipment and expand our facilities in
anticipation of receiving revenues and fees in future periods. Because many of
our expenses for these activities are components of our cost of revenues, the
percentage of our cost of revenues to revenues plus Visteon fees could be
volatile.

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

     We plan to increase expenditures for our sales and marketing efforts,
development of new technology, capital improvements to our facilities and
improvement of our operational and financial systems. The historical
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financial information upon which we can base our planned operating costs and
capital expenditures is very limited and may not be meaningful. Our planned
expense levels are relatively fixed in the short term and are based on our
anticipation of future revenues. We may not be able to accurately forecast
revenues due to our limited operating history. The difficulty of forecasting our
revenues will be increased if a slowdown in the economy causes customers 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 will be
negatively affected.

WE MAY NOT BE ABLE TO HIRE OR RETAIN QUALIFIED STAFF

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

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

     If we are unable to undertake new business due to a shortage of staff or
technology resources, our growth will be impeded. Our customers are typically
large enterprises. At times, these customers ask us to pursue projects that put
a strain on our resources, both in terms of people and technology. At the same
time, penetration of new product categories often requires that we build up a
significant database of new information. This, too, often requires a substantial
amount of time from our market making staff. If our staff does not have the time
to find and assimilate this new information, we may not be able to extend our
services to new product categories. Therefore, there may be times when our
opportunities for revenue growth may be limited by the capacity of our internal
resources rather than by the absence of market demand.

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

     Rapid expansion strains our infrastructure, management, internal controls
and financial systems. We may not be able to effectively manage our present
growth or any future expansion. We have recently experienced significant growth,
with our revenues plus Visteon fees for 2000 increasing 337% compared to 1999.
To support our growth, we have hired the majority of our employees within the
last year. This rapid growth has also strained our ability to integrate and
properly train our new employees. Inadequate integration and training of our
employees may result in underutilization of our workforce and may reduce our
revenues or operating results.

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

     Our sales cycle is long, typically taking from one to six months from
initial customer contact until we sign a contract. Not every potential customer
that we solicit actually purchases our services. Because we offer a new method
of industrial purchasing, we must educate potential customers on the use and
benefits of our services. We need to spend a significant amount of time with
multiple decision makers in a prospective

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<PAGE>   16

customer's organization to sell our services. Other factors that contribute to
the length and uncertainty of our sales cycle and that may reduce the likelihood
that customers will purchase our services include:

     - budgeting constraints;

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

     - the strength of pre-existing supplier relationships;

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

     - an aversion to new purchasing methods.

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

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

     Frequently, we begin a relationship with a new customer by entering into a
short-term service agreement that we hope will lead to a long-term service
agreement. Failure to move a sufficient number of customers from short-term to
long-term service agreements would hurt our operating results. Our initial
agreement with a customer usually involves a period of trial and evaluation with
relatively small volume online markets. This initial period, in which we learn
about our customer's business and its related product categories and educate our
customer about the best use of our services for its organization, requires a
very significant expenditure of our time and resources. A subsequent longer-term
service agreement often involves more frequent and larger volume bids. Customers
may decide not to enter into a long-term service agreement with us, or may delay
entering into such an agreement until a later time. Because we invest a
significant amount of time and resources early in a customer relationship, our
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.

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 in any given market 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 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 marketplace;

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

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

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

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

     A significant disruption in our marketplace 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 marketplace, with the most significant being a breakdown in
the

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computer network over which our markets are conducted. This computer network is
provided to us by an outside vendor, and this kind of interruption may occur in
the future. During these disruptions, participants may lose their online
connection or we may not receive their bids in a timely manner. Any
interruptions in our service may undermine actual and potential customers'
confidence in the reliability of our business.

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

     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 market participants from outside North
America who may use older or inferior technologies, which may not operate
properly. In addition, hardware and software are potentially vulnerable to
interruption from power failures, telecommunications outages, network service
outages and disruptions, natural disasters and vandalism and other misconduct.
Our business interruption insurance would not compensate us fully for any losses
that may result from these disruptions.

THE LOSS OF OUR KEY EXECUTIVES COULD DISRUPT OUR BUSINESS

     None of our executive officers or other key employees is bound by an
employment agreement. We rely on the leadership and vision of the executive
officers identified in the table on page 18 of this Form 10-K and the loss of
any of these executives could disrupt the Company's growth.

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

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

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

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

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

     We currently have practices and procedures in place to ensure the
confidentiality of our customers' information. However, our security procedures
to protect against the risk of inadvertent disclosure or intentional breaches of
security might fail to adequately protect information that we are obligated to
keep confidential. We may not be successful in adopting more effective systems
for maintaining confidential information, so our exposure to the risk of
disclosure of the confidential information of others may grow with

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

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

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

OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS

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

                                        16
<PAGE>   19

cost, our growth prospects and operating results may be harmed through
impairment of our ability to conduct business or through increased cost.

FUTURE GOVERNMENT REGULATION OF THE INTERNET AND ONLINE 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 commerce, other than
regulations generally applicable to all businesses. However, the Internet has
rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing regulations to the Internet environment. Laws
and regulations may be introduced and court decisions reached that affect the
Internet or other online services, covering issues such as user pricing, user
privacy, freedom of expression, access charges, content and quality of products
and services, advertising, intellectual property rights and information
security. In addition, because we offer our services worldwide and 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 an Internet company, it is unclear in which jurisdictions we are
actually conducting business. Our failure to qualify to do business in a
jurisdiction that requires us to do so could subject us to fines or penalties
and could result in our inability to enforce contracts in that jurisdiction.

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

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

     The imposition of sales, value-added or similar taxes could diminish our
competitiveness and harm our business. We do not collect sales or other similar
taxes for goods purchased through our online 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 services to
international buyers and often have international suppliers participate in our
marketplace. We have international subsidiaries located in Europe, Asia and
Australia that serve our customers based abroad, as well as the European, Asian
and Australian operations of our multinational customers based in the United
States. We also plan to establish similar branches or subsidiaries in other
parts of the world. We have experienced, and expect to continue to experience,
significant costs for our international operations as we add staff and
facilities in foreign countries. These costs, together with the costs of the
overhead needed to comply with legal, regulatory and accounting requirements
that differ from those in the United States, may reduce our operating results.
Finally, our international operations are subject to disruption from political
and economic instability in the countries in which they are located, which may
interrupt our ability to conduct business and impose additional costs upon us.

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

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

                                        17
<PAGE>   20

                                   MANAGEMENT

     The following table sets forth information regarding our executive officers
as of March 1, 2001.

<TABLE>
<CAPTION>
            NAME              AGE                            POSITION(S)
----------------------------  ---    ------------------------------------------------------------
<S>                           <C>    <C>
Glen T. Meakem..............  37     Chief Executive Officer and Chairman of the Board
David J. Becker.............  37     President, Chief Operating Officer and Director
William R. Blair............  49     Senior Vice President and Chief Technology Officer
Scott D. Grimes.............  38     Senior Vice President of Business Development
Joan S. Hooper..............  43     Senior Vice President and Chief Financial Officer
John P. Levis, III..........  39     Senior Vice President of People Development
David H. McCormick..........  35     Senior Vice President and General Manager of Core Business
                                     Markets
Douglas M. Wnorowski........  39     Senior Vice President of Operations
</TABLE>

     GLEN T. MEAKEM co-founded FreeMarkets in 1995 and has served as its Chief
Executive Officer, Chairman of the Board and a director since inception. Mr.
Meakem also held the office of President from FreeMarkets' inception until June
2000. 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.

     DAVID J. BECKER has served as the President of FreeMarkets since June 2000
and as its Chief Operating Officer since March 1998. Prior to becoming
President, Mr. Becker served as an Executive Vice President since March 1998.
From October 1996 to February 1998, Mr. Becker served as our Vice President of
Market Making. Prior to joining FreeMarkets, from March 1992 to September 1996,
Mr. Becker was employed with Dole Fresh Fruit International, Ltd., where he
worked in key financial and management positions at Dole's Latin and South
American headquarters and subsidiaries. Mr. Becker's most recent position with
Dole was a Manager, Worldwide Logistics Information Network.

     WILLIAM R. BLAIR has served as Senior Vice President and Chief Technology
Officer of FreeMarkets since June 2000. From March 1999 to June 2000, Mr. Blair
served as Vice President of Product Engineering. Mr. Blair joined FreeMarkets in
March 1999 from Trost Manufacturing, where he served as Vice President and
General Manager. Prior to joining Trost, Mr. Blair held a number of
manufacturing and information technology management positions at General
Electric, where he built his career for over 20 years. Most recently at GE, Mr.
Blair was a key technology executive for the GE Trading Process Network.

     SCOTT D. GRIMES has served as Senior Vice President of Business Development
since February 2000. Prior to joining FreeMarkets, Mr. Grimes was employed by
Paging Network Inc., a leading provider of wireless messaging and information
services across the United States and Canada; most recently, Mr. Grimes served
as senior vice president of corporate development for Vast Solutions, a PageNet
subsidiary from April 1998 to February 2000. Prior to joining Paging Network
Inc., Mr. Grimes was a principal at McKinsey & Company, Inc. from June 1991 to
April 1998.

     JOAN S. HOOPER has served as Senior Vice President since June 2000 and as
Chief Financial Officer and Treasurer since September 1999. Before becoming
Senior Vice President, Ms. Hooper served as a Vice President from September
1999. Prior to joining FreeMarkets, Ms. Hooper was employed by AT&T Corp. from
March 1979 to September 1999, serving in several key financial and senior
management positions within various divisions, including divisions that are now
independent companies -- Lucent Technologies, Inc., US West, Inc. and NCR Corp.
Ms. Hooper's most recent position was a Financial Vice President of AT&T
Business Services. Ms. Hooper is a Certified Public Accountant and Certified
Management Accountant.

     JOHN P. LEVIS, III has served as Senior Vice President of People
Development since June 2000 and as Vice President of People Development since
September 1998. From January 1997 to September 1998, Mr. Levis served as our
Vice President of Client Development. Prior to joining FreeMarkets, from August
1990 to December 1996, Mr. Levis was a consultant with McKinsey & Company, Inc.,
where he served

                                        18
<PAGE>   21

healthcare, financial services, energy, food service and media clients on issues
of marketing, channel strategy and cost management.

     DAVID H. MCCORMICK has served 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 senior executive with McKinsey & Company, Inc.

     DOUGLAS M. WNOROWSKI has served as Senior Vice President of Operations of
FreeMarkets since June 2000. From June 1999 to June 2000, Mr. Wnorowski served
as our Vice President of Supply Markets. Prior to joining FreeMarkets, from
August 1992 to June 1999, Mr. Wnorowski was employed by Respironics Inc., a
developer, manufacturer and marketer of medical devices for respiratory disorder
patients, where he served in several key management and leadership positions in
the areas of sales and marketing, operations, mergers and acquisitions, and
business development. Mr. Wnorowski's most recent position with Respironics was
as Vice President of Sales and Marketing with responsibility for Europe, Africa
and the Middle East.

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 occupies 182,000
square feet of office space under a lease that expires in May 2010. We believe
that our existing facilities in Pittsburgh, coupled with options we have to
lease additional space, are adequate for our growth needs for the next several
years. We also lease office space in six other North American metropolitan
areas, as well as four in Europe and six in Asia and Australia. We may add
additional offices in the United States and in other countries.

ITEM 3.  LEGAL PROCEEDINGS

     In 2000, ten securities fraud class action complaints were filed against
the Company and three executive officers in federal court in Pittsburgh,
Pennsylvania, which the court consolidated into a single proceeding. The
plaintiffs alleged that the Company and the other defendants violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934. The Company and the
individual defendants moved to dismiss the case on the grounds that the
plaintiffs failed to allege facts sufficient to support their claim that the
defendants violated the securities laws. On December 27, 2000, the court granted
the motion to dismiss, having concluded that the plaintiffs' complaint was
legally deficient. Although the court granted the plaintiffs leave to amend
their complaint in an attempt to cure its deficiencies, the plaintiffs elected
to abandon their claims altogether. On February 16, 2001, the court dismissed
the case with prejudice pursuant to a stipulation of voluntary dismissal
executed by all parties. The case is now closed. No money or other consideration
was given, or will be given, to the plaintiffs or their counsel in exchange for
their agreement to dismiss the case.

     Since April 27, 2001, five 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
ongoing discussions with the staff of 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. The Company and the
individual defendants believe that the plaintiffs' allegations are completely
without merit and they intend to defend these claims vigorously.

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

     Not applicable.

                                        19
<PAGE>   22

                                    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 March 1, 2001, the last sale price
of the common stock was $18.25 per share. The following table sets forth the
range of high and low bid prices of our common stock for the periods indicated.
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                 --------------------------------------------------------------------------
                                 MARCH 31, 2000    JUNE 30, 2000    SEPTEMBER 30, 2000    DECEMBER 31, 2000
                                 --------------    -------------    ------------------    -----------------
<S>                              <C>               <C>              <C>                   <C>
PRICE RANGE PER SHARE
  Low..........................     $119.88           $ 36.75             $37.63               $16.00
  High.........................     $370.00           $135.00             $92.06               $58.50
</TABLE>

     As of March 1, 2001, there were approximately 413 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.

                                        20
<PAGE>   23

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                   -------------------------------------------------------------------
                                      2000          1999          1998          1997          1996
                                   -----------   -----------   -----------   -----------   -----------
                                             (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                <C>           <C>           <C>           <C>           <C>
CONSOLIDATED STATEMENT OF
  OPERATIONS DATA:
Revenues.........................  $    83,339   $    20,880   $     7,801   $     1,783   $       409
                                   -----------   -----------   -----------   -----------   -----------
Operating costs and expenses:
  Cost of revenues...............       48,896        12,166         4,258         1,149           506
  Research and development,
     excluding stock
     compensation................       19,121         4,913           842           292           394
  Sales and marketing, excluding
     stock compensation and
     warrant costs...............       41,505        11,939           656           586           321
  General and administrative,
     excluding stock
     compensation................       34,081         9,316         2,026           837           630
  Stock compensation -- research
     and development.............          443           283            --            --            --
  Stock compensation and warrant
     costs -- sales and
     marketing...................        5,965         4,669            --            --            --
  Stock compensation -- general
     and administrative..........            3           248            --            --            --
  Goodwill amortization..........       90,749            --            --            --            --
  Write-off of in-process
     research and development....        7,397            --            --            --            --
                                   -----------   -----------   -----------   -----------   -----------
Total operating costs and
  expenses.......................      248,160        43,534         7,782         2,864         1,851
                                   -----------   -----------   -----------   -----------   -----------
Operating (loss) income..........     (164,821)      (22,654)           19        (1,081)       (1,442)
  Interest and other income,
     net.........................        8,409           833           215            20            11
                                   -----------   -----------   -----------   -----------   -----------
Net (loss) income................  $  (156,412)  $   (21,821)  $       234   $    (1,061)  $    (1,431)
                                   ===========   ===========   ===========   ===========   ===========
Earnings per share:
  Basic..........................  $     (4.21)  $     (1.46)  $      0.02   $     (0.10)  $     (0.14)
  Diluted........................        (4.21)        (1.46)         0.01         (0.10)        (0.14)
Weighted average shares:
  Basic..........................   37,189,440    14,914,189    11,191,670    10,618,481    10,316,599
  Diluted........................   37,189,440    14,914,189    26,776,611    10,618,481    10,316,599
</TABLE>

<TABLE>
<CAPTION>
                                                           AS OF DECEMBER 31,
                                   -------------------------------------------------------------------
                                      2000          1999          1998          1997          1996
                                   -----------   -----------   -----------   -----------   -----------
                                                             (IN THOUSANDS)
<S>                                <C>           <C>           <C>           <C>           <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term
  investments....................  $   121,148   $   210,244   $     1,656   $     1,999   $       523
Working capital..................      108,874       208,850         3,814         2,783           505
Total assets.....................      462,546       231,654         6,870         3,336           985
Long-term debt, excluding current
  portion........................          544         3,278           413            --            21
Total stockholders' equity.......      416,798       218,654         4,592         3,052           792
</TABLE>

                                        21
<PAGE>   24

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 creates business-to-business online auctions and provides
electronic commerce technology and services to buyers of industrial parts, raw
materials, commodities and services. We have created more than 9,200 online
auctions--which we call "markets"--for more than $14 billion worth of goods and
services for our customers. We estimate, based upon the difference between the
prices that our customers have historically paid and the lowest prices that are
identified in our auctions, that our auctions have resulted in potential savings
of over $2.7 billion for our customers.

     We combine our proprietary technology platform with an in-depth knowledge
of the supply markets for direct materials. Because direct materials are often
custom-made to buyers' specifications, there are no catalogs or price lists to
enable buyers to make price comparisons. The purchasing process is further
complicated by the fragmentation of many supply markets and the importance of
product quality in supplier selection. Because this complexity leads to market
inefficiencies, we think that buyers of direct materials often pay prices that
are too high.

     Our online markets help buyers of direct materials obtain lower prices and
make better purchasing decisions. In a FreeMarkets online market, suppliers from
around the world can submit bids in a real-time, interactive competition that is
designed to be fair to all participants. We offer customers our FullSource
solution, in which we help the customer to identify and screen suppliers and to
assemble a request for quotation that provides detailed, clear and consistent
information for suppliers to use as a basis for their competitive bids. We also
offer our QuickSource solution, which enables customers to use our technology to
run their own online markets. In addition, we operate the FreeMarkets Asset
Exchange for buyers and sellers of surplus assets and inventory.

DETERMINATION OF ONLINE MARKET VOLUME AND ACHIEVABLE SAVINGS

     We believe that one indicator of our market acceptance is the dollar volume
of materials, commodities and services for which we create online markets on
behalf of our customers. We measure this online market volume by multiplying the
lowest bid price per unit in each online 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 online market volume for the
estimated term.

     Online 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, the length of the customer contracts and the industry in which
the items in the online markets will be used. We believe that online market
volume may be correlated with revenues and operating results over periods of one
year or longer; however, because of our limited operating history, a strong
correlation has not yet been demonstrated. Moreover, online market volume has
varied in the past, and we expect it to vary in the future. The following table
sets forth our online market volume for the periods indicated:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                             ----------------------------------------
                                              2000      1999     1998    1997    1996
                                             ------    ------    ----    ----    ----
                                                          (IN MILLIONS)
<S>                                          <C>       <C>       <C>     <C>     <C>
Online market volume.......................  $9,928    $2,725    $979    $257    $124
</TABLE>

     We believe that the savings achievable by customers through our online
markets is an indicator of the effectiveness of our online market services. To
estimate these savings, we compare the last price paid by our customer for the
items in our online markets against the lowest bid price for those items in our
online market. Actual savings that our customers achieve may not equal these
estimates because our customer may not select

                                        22
<PAGE>   25

the lowest bid price, the parties may agree to change price terms after our
online market or our customer may not actually buy all or any of the items for
which bids have been received in our online markets.

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

REVENUES

     Our selected financial data exclude from revenues the amounts that we earn
under a contract with Visteon Corporation pursuant to which we provide access to
our eMarketplace and perform services for Visteon. Visteon pays us fixed monthly
fees plus variable fees if specified volume thresholds are exceeded. At the time
we executed the service contract, we granted a warrant for 1.75 million shares
to Visteon with an exercise price of $.01 per share, and we receive 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. Because of the grant of this warrant, we are
required to exclude from our revenues the fees we earn from Visteon, and to
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 and bonus
decisions and other performance indicators, we treat the fees we earn from
Visteon in the same manner as revenues from other customers. Accordingly, we
have referred, where applicable, to "revenues plus Visteon 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 under our service contract with Visteon:

<TABLE>
<S>                                                           <C>
Revenues plus fees under Visteon service contract
  characterized as payment for warrant......................  $91,276,346
Less fees under Visteon service contract characterized as
  payment for warrant.......................................    7,937,500
                                                              -----------
Revenues....................................................  $83,338,846
                                                              ===========
</TABLE>

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

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

     Our service contract with Visteon is a standard customer agreement (except
for the warrant). The contract with Visteon has a five-year term ending in 2005,
and, as of December 31, 2000, provided for a fixed

                                        23
<PAGE>   26

monthly payment stream larger than any other customer contract. We do not expect
to recognize revenues under our Visteon service contract for either the fixed or
any variable fees we earn because we have determined, as a result of a review by
the staff of the SEC, that we must allocate those fees as payment for the
warrant that we granted to Visteon. We incurred approximately $3 million in
direct costs in 2000 to service the Visteon contract. We estimate that the
direct costs that we will incur to service the Visteon contract from December
31, 2000 through the expiration of the contract will be approximately $19
million in excess of the revenue that we will recognize under generally accepted
accounting principles from that contract. We will recognize the resulting loss
over the life of the contract as costs are incurred to service the contract.

LIMITED OPERATING HISTORY

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

     The recent slowdown in the economy may cause customers to defer or postpone
their purchasing decisions, increasing sales cycles for our products and
services and possibly reducing our revenue and income. In addition, the amount
of fixed monthly fees that we are able to negotiate for new contracts 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.

CUSTOMER CONCENTRATION

     We depend on United Technologies and Visteon for a material portion of our
revenues and fees. In October 2000, we entered into a three-year contract
extension with United Technologies. In April 2000, we entered into a five-year
agreement with Visteon that provides for a fixed monthly payment stream larger
than any other current customer contract. Revenues from United Technologies were
$9,014,000 in 2000 and $7,006,000 in 1999. Fees from Visteon were $7,937,500 in
2000. We anticipate that we will continue to diversify our base of customers by
adding new customers and increasing sales to existing customers, and that the
percentage of total revenues and fees that we derive from United Technologies
and Visteon will decrease.

                                        24
<PAGE>   27

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             2000      1999     1998
                                                            ------    ------    -----
<S>                                                         <C>       <C>       <C>
Revenues plus fees under Visteon service contract
  characterized as payment for warrant....................   100.0%    100.0%   100.0%
  Less fees under Visteon service contract characterized
     as payment for warrant...............................     8.7        --       --
                                                            ------    ------    -----
Revenues..................................................    91.3     100.0    100.0
                                                            ------    ------    -----
Operating costs and expenses:
  Cost of revenues........................................    53.6      58.3     54.6
  Research and development, excluding stock
     compensation.........................................    21.0      23.5     10.8
  Sales and marketing, excluding stock compensation and
     warrant costs........................................    45.5      57.2      8.4
  General and administrative, excluding stock
     compensation.........................................    37.3      44.6     26.0
  Stock compensation--research and development............     0.5       1.3       --
  Stock compensation and warrant costs--sales and
     marketing............................................     6.5      22.4       --
  Stock compensation--general and administrative..........     0.0       1.2       --
  Goodwill amortization...................................    99.4        --       --
  Write-off of in-process research and development........     8.1        --       --
                                                            ------    ------    -----
Operating (loss) income...................................  (180.6)   (108.5)     0.2
  Interest and other income, net..........................     9.2       4.0      2.8
                                                            ------    ------    -----
Net (loss) income.........................................  (171.4%)  (104.5%)    3.0%
                                                            ======    ======    =====
</TABLE>

YEARS ENDED DECEMBER 31, 2000 AND 1999

  REVENUES

     Revenues plus Visteon fees increased 337% from $20.9 million in 1999 to
$91.3 million in 2000. The increase in revenues plus Visteon fees is primarily
attributable to a larger number of new customers for which we conducted online
markets, as well as increased use of our services by existing customers. The
number of customers served increased 186% from 35 in 1999 to 100 in 2000. Online
market volume grew 264% from $2.7 billion in 1999 to $9.9 billion in 2000.
Revenues in 2000 exclude Visteon fees of $7,937,500.

  OPERATING COSTS AND EXPENSES

     COST OF REVENUES.  Cost of revenues increased from $12.2 million in 1999 to
$48.9 million in 2000. As a percentage of revenues plus Visteon fees, cost of
revenues decreased from 58% in 1999 to 54% in 2000. The increase in absolute
dollar amounts from 1999 to 2000 reflects an increase in the number of market
making staff to serve our growing customer base and the increased cost of our
operations due to the expansion of our office space and our services into
international locations. 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.

     The decrease in cost of revenues as a percentage of revenues plus Visteon
fees from 1999 to 2000 is primarily the result of increased staff productivity
as our personnel became more specialized in various market making activities.
Also, we have attained some operating efficiencies from our investments in
information tools to automate portions of our market making process, as well as
organizing our market making staff in such a way to take advantage of our domain
supply vertical expertise. Although we will continue to invest in the

                                        25
<PAGE>   28

growth of our business, we expect our cost of revenues as a percentage of
revenues plus Visteon fees to continue to decrease in the future.

     RESEARCH AND DEVELOPMENT, EXCLUDING STOCK COMPENSATION.  Research and
development costs increased from $4.9 million, or 24% of revenues in 1999, to
$19.1 million, or 21% of revenues plus Visteon fees in 2000. The increase in
absolute dollars relates primarily to an increase in the number of research and
development staff and associated costs for the continued development of our
BidWare software and other market making technology, which is designed to
further improve staff productivity. As a result of a change in certain
information technology initiatives, we recognized additional depreciation and
other charges of $1.6 million in the third quarter of 2000 related to
capitalized software and other computer equipment. We expect to increase our
research and development costs in absolute dollars in future periods to invest
in new technology for future product and service offerings, particularly our
e-Sourcing platform, and to adapt and add features to our existing technology;
however, we anticipate these costs will continue to decrease as a percentage of
revenues plus Visteon fees in future periods.

     SALES AND MARKETING, EXCLUDING STOCK COMPENSATION AND WARRANT COSTS.  Sales
and marketing costs increased from $11.9 million, or 57% of revenues in 1999, to
$41.5 million, or 46% of revenues plus Visteon fees in 2000. The increase in
absolute dollars reflects a significant growth in sales and marketing staff,
public relations costs, trade shows and advertising as we pursued our brand and
business development strategy and accelerated our spending on potential future
growth. We expect to continue to increase our sales and marketing costs in
absolute dollars in future periods to promote our brand, to pursue our business
development strategy and to increase the size of our sales force; however, we
anticipate these costs will continue to decrease as a percentage of revenues
plus Visteon fees in future periods.

     GENERAL AND ADMINISTRATIVE, EXCLUDING STOCK COMPENSATION.  General and
administrative costs increased from $9.3 million, or 45% of revenues in 1999, to
$34.1 million, or 37% of revenues plus Visteon fees in 2000. The increase in
absolute dollars is primarily attributable to the addition of personnel to our
general and administrative staff in the areas of technical operations, human
resources, legal, finance and facilities management. The increase can also be
attributed to the expansion of our infrastructure from four offices at the end
of 1999 to eighteen offices at the end of 2000, many of which are international
offices to support our growing customer base. As a result of our transition to a
globally-integrated enterprise resource planning ("ERP") system, we recognized
additional depreciation and other charges of $1.2 million in the third quarter
of 2000 related to software and other computer equipment. We expect that general
and administrative costs will continue to increase in absolute dollars in future
periods as we continue to add staff and infrastructure to support our domestic
and international business growth and bear the increased costs associated with
being a public company; however, we anticipate these costs will continue to
decrease as a percentage of revenues plus Visteon fees in future periods.

     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 1999
and 2000, $451,000 and $414,000, respectively, was amortized related to these
grants. In September 1999, we recorded $4.5 million of warrant costs related to
a warrant granted to a customer. 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 2000, $13.5
million was amortized related to this warrant, with $7.9 million reflected as a
reduction to our revenues (reducing the revenues under the Visteon service
contract to zero) and $5.6 million as stock compensation and warrant
costs -- sales and marketing. In April 2000, we also recorded $196,000 of
unearned stock compensation related to stock options granted to a consultant,
which is being amortized over a one-year period ending March 2001. In 2000,
$147,000 was amortized related to this grant. In 2000, we also recorded $314,000
of stock compensation related to a modification of stock options held by a
former employee.

     GOODWILL AMORTIZATION.  In connection with our acquisitions of iMark.com,
Inc. ("iMark") and Surplus Record, Inc. and SR Auction, Inc. (collectively,
"Surplus Record") in March 2000, we recorded goodwill of $354.3 million, of
which $90.7 million was amortized in 2000.

                                        26
<PAGE>   29

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

  INTEREST AND OTHER INCOME, NET

     Interest and other income was $833,000 in 1999 compared to $8.4 million in
2000. The increase was primarily attributable to increased interest income from
the investment of proceeds from our initial public offering ("IPO") into
interest-bearing, investment grade securities. In 2000, we earned $10.1 million
of interest income at a weighted-average rate of return of 6.1%. Interest and
other income was partially offset by $1.0 million of asset write-offs in 2000.

YEARS ENDED DECEMBER 31, 1999 AND 1998

  REVENUES

     Revenues increased 168% from $7.8 million in 1998 to $20.9 million in 1999.
The increase in revenues is primarily attributable to an increased number of new
customers for which we conducted online markets, as well as increased use of our
services by existing customers. The number of customers served increased 192%
from 12 in 1998 to 35 in 1999. Revenues in both periods were concentrated in two
customers, United Technologies and General Motors. Revenues from United
Technologies increased 56% from $4.5 million in 1998 to $7.0 million in 1999 due
to its increased use of our online market services and technology. Revenues from
General Motors increased 107% from $1.5 million in 1998 to $3.1 million in 1999
due to the incremental effect of its long-term agreement with us beginning in
June 1998, as well as the growth of the revenues earned under this agreement
from Delphi Automotive Systems, a former subsidiary of General Motors.

  OPERATING COSTS AND EXPENSES

     COST OF REVENUES.  Cost of revenues increased from $4.3 million in 1998 to
$12.2 million in 1999. As a percentage of revenues, cost of revenues increased
from 55% to 58%. The increase in absolute dollar amounts from 1998 to 1999
reflects an increase in the number of market making staff and the increased cost
of our operations due to a relocation of our headquarters to a larger facility.

     The increase in cost of revenues as a percentage of revenues is primarily
the result of our rapid growth in the number of customers served from 12 in 1998
to 35 in 1999, many of which enter into short-term agreements with us initially
in order to try our services before committing to longer-term relationships.
Generally, we do not achieve economies of scale early in a customer
relationship. Therefore, our cost of revenues as a percentage of revenues are
typically higher in the early stages of a customer relationship. Also, cost of
revenues as a percentage of revenues in 1998 was favorably affected by a $1.6
million performance incentive from United Technologies.

     RESEARCH AND DEVELOPMENT, EXCLUDING STOCK COMPENSATION.  Research and
development costs increased from $842,000, or 11% of revenues in 1998, to $4.9
million, or 24% of revenues in 1999. The increase in both absolute dollars and
as a percentage of revenues relates primarily to an increase in the number of
research and development staff and associated costs for the continued
development of our BidWare software and other market making technology, which is
designed to further improve staff productivity.

     SALES AND MARKETING, EXCLUDING STOCK COMPENSATION AND WARRANT COSTS.  Sales
and marketing costs increased from $656,000, or 8% of revenues in 1998, to $11.9
million, or 57% of revenues in 1999. The increase in both absolute dollars and
as a percentage of revenues reflects a significant ramp-up in sales and
marketing staff, public relations costs, trade shows and advertising as we
pursued our brand and business development strategy and accelerated our spending
on potential future growth. As a result, sales and marketing costs in 1999
included certain costs not incurred in the same period in 1998, such as those
for advertising in professional trade magazines, airport advertising and other
promotions.

     GENERAL AND ADMINISTRATIVE, EXCLUDING STOCK COMPENSATION.  General and
administrative costs increased from $2.0 million, or 26% of revenues in 1998, to
$9.3 million, or 45% of revenues in 1999. The increase in both absolute dollars
and as a percentage of revenues is primarily attributable to the addition of
                                        27
<PAGE>   30

personnel to our general and administrative staff in the areas of technical
operations, human resources, legal, finance and facilities management. The
increase is also attributable to start-up costs of $200,000 and other recurring
costs of $1.3 million associated with our European subsidiary, which we
established in late 1998.

     STOCK COMPENSATION AND WARRANT COSTS.  In September 1999, we issued a
warrant to a customer to purchase 304,431 shares of Series D preferred stock at
an exercise price of $.01 per share, in exchange for the customer's agreement to
delete from its contract with us provisions that limited our ability to render
services to its competitors. As a result, we recorded an expense of $4.5 million
in September 1999.

     Additionally, we recorded $2.0 million of unearned stock compensation
related to employee stock options granted in June and July 1999. In 1999,
$451,000 was amortized related to these grants. We also recorded a one-time
charge of $246,000 to stock compensation related to options granted to our
Assistant Secretary, who is neither an employee nor a director.

  INTEREST AND OTHER INCOME, NET

     Interest and other income was $215,000 in 1998 compared to $833,000 in
1999. The increase was primarily attributable to increased interest income from
the investment of proceeds from our IPO into interest-bearing, investment grade
securities. Additionally, we received an economic development grant from the
Commonwealth of Pennsylvania for $150,000 during 1998 and wrote off property and
equipment of $119,000 related to our move to our new headquarters in 1999.

LIQUIDITY AND CAPITAL RESOURCES

     We have historically satisfied our cash requirements primarily through a
combination of revenues, equity financing transactions and bank borrowings. In
December 1999, we completed our IPO, which resulted in net proceeds of $182.2
million. As of December 31, 2000, we had cash and cash equivalents of $53.0
million, short-term investments of $68.2 million and working capital of $108.9
million.

     Net cash used in operating activities totaled $1.2 million in 1998, $15.9
million in 1999 and $40.2 million in 2000. Our use of cash in 1998 was primarily
attributable to an increase in working capital. The use of cash in 1999 and 2000
related primarily to the operating loss generated by our investment in the
growth of our business, including an increase in personnel from 376 at the end
of 1999 to 968 at the end of 2000. In addition, in March 1999, we began leasing
a significantly larger corporate headquarters facility. The lease, which runs
through May 2010, currently requires an annual lease payment of $3.8 million.
Our lease payments will grow as we take additional office space. Net cash used
in operating activities in 2000 does not reflect $5.0 million received under our
service contract with Visteon.

     Net cash used in investing activities totaled $859,000 in 1998, $43.7
million in 1999 and $91.5 in 2000. Our use of cash in investing activities in
1998 resulted primarily from our continued additions to and upgrade of computing
and telecommunications equipment. At the end of 1998, we began purchasing
equipment and reduced our use of leased equipment. During 1999 and 2000, we
spent approximately $10.4 million and $39.6 million, respectively, to furnish
our new facility and purchase computing and telecommunications equipment to
accommodate our increase in personnel. We also spent $33.0 million and $167.7
million in 1999 and 2000, respectively, to purchase short-term investments,
partially offset by the maturity of short-term investments totaling $132.6
million in 2000. We also used $16.7 million related to acquisitions that closed
in March 2000.

     Net cash provided by financing activities totaled $1.7 million in 1998,
$235.1 million in 1999 and $7.5 million in 2000. The positive financing cash
flows in 1998, 1999 and 2000 primarily reflect the net proceeds from the
issuance of stock, bank borrowings and the exercise of stock options and
warrants. Cash provided by financing activities in 2000 includes $5.0 million
received under our service contract with Visteon. We are required to classify
these receipts as payment for the warrant that we granted to Visteon in April
2000. Cash provided by financing activities in 2000 was partially offset by the
repayment of debt assumed in the iMark acquisition.

     Prior to November 2000, we had in place a $10.0 million bank facility,
consisting of a $5.0 million revolving line of credit and two equipment loans
originally totaling $5.0 million. In November 2000, we
                                        28
<PAGE>   31

terminated the $10.0 million facility and entered into a one-year revolving
credit facility with a maximum borrowing base of $25.0 million. At December 31,
2000, $16.2 million was available based on eligible accounts receivable.
Borrowings under the new facility bear interest at the lender's prime rate. As
of December 31, 2000, $3.7 million was outstanding under the facility and the
interest rate was 9.5%.

     Our current bank credit facility contains restrictive covenants, including
a limitation on incurring additional indebtedness and paying dividends. Our bank
credit facility also includes requirements as to minimum tangible net worth and
current and debt service ratios. We have pledged substantially all of our
tangible assets as collateral for the current credit facility.

     Capital expenditures were $10.4 million in 1999 and $39.6 million in 2000.
Capital expenditures over these periods were primarily made to purchase computer
and telecommunications equipment and furnishings in our new corporate
headquarters and other offices, as well as to expand our network and server
capacity. In 2000, we implemented an ERP that more fully integrates our
financial systems and other operational reporting. This system went live in
October 2000. We funded these capital expenditures through a combination of
sales of our equity securities and bank borrowings. We intend to fund future
capital expenditures through a combination of proceeds from our IPO, bank
borrowings and cash from operations. As a result of the significant investments
we have made in our operations, infrastructure and personnel in 2000, we
anticipate a decrease in our capital expenditures in future periods.

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

INCOME TAXES

     We incurred a net taxable loss in 2000 and 1999, and therefore did not
record a provision for income taxes in those periods. In 1998, we offset our net
taxable income through the use of net operating loss carryforwards.

     As of December 31, 2000, we had $83.9 million of federal and state net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. We may use these operating loss carryforwards to offset
future federal and state income taxes through 2020 and 2010, respectively.
However, in 1996 we sold a sufficient amount of our convertible preferred stock
to constitute an "ownership change" under the Internal Revenue Code; as a
result, our future utilization of these net operating loss carryforwards that we
accumulated prior to that change in ownership, amounting to $2.2 million, will
be subject to a limitation of $441,000 per year. We may generate additional net
operating loss carryforwards in the future; however, there is no guarantee that
we will be able to fully utilize all of them.

RECENT ACCOUNTING PRONOUNCEMENT

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133, which is effective for all
quarters beginning January 1, 2001, establishes accounting and reporting
standards for derivative financial instruments and hedging activities related to
those instruments. The adoption of this standard did not have a material impact
on our consolidated financial statements.

                                        29
<PAGE>   32

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  FOREIGN CURRENCY RISK

     Nearly all 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 subsidiaries located in Europe, Asia and
Australia, and we intend to establish additional foreign subsidiaries. In the
future, a portion of the revenues we derive from international operations may be
denominated in foreign currencies. We incur costs for our overseas offices in
the local currency of those offices for staffing, rent, telecommunications and
other services. As a result, our operating results could become subject to
significant fluctuations based upon changes in the exchange rates of those
currencies in relation to the United States dollar. Furthermore, to the extent
that we engage in international sales denominated in United States dollars, an
increase in the value of the United States dollar relative to foreign currencies
could make our services less competitive in international markets.

     We believe that our only significant risk related to foreign currency is
cash flow risk. Since the majority of our foreign currency denominated cash
flows relate to funding the operations of our Belgian subsidiary and that
currency relative to the United States dollar did not materially fluctuate
during 2000, we do not believe this risk is material. 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. 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 all of our investments are in
short-term instruments. Borrowings under our existing credit lines are also
interest rate sensitive, because the interest rate charged by our bank varies
with changes in the prime rate of lending. At December 31, 2000, our short-term
investments were $68.2 million and our average rate of return was 6.1%. Assuming
a 10% hypothetical change in this average rate, our investment income would
change by approximately $400,000. As it relates to our credit lines, we do not
believe that our interest rate risk is material since the balance outstanding
under our credit line was $3.7 million at December 31, 2000.

                                        30
<PAGE>   33

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
Report of Independent Accountants...........................   32

Consolidated Balance Sheets as of December 31, 2000 and
  1999......................................................   33

Consolidated Statements of Operations for each of the three
  years in the period ended December 31, 2000...............   34

Consolidated Statements of Stockholders' Equity for each of
  the three years in the period ended December 31, 2000.....   35

Consolidated Statements of Cash Flows for each of the three
  years in the period ended December 31, 2000...............   36

Notes to Consolidated Financial Statements..................   37
</TABLE>

                                        31
<PAGE>   34

                       REPORT OF INDEPENDENT ACCOUNTANTS

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, 2000 and 1999
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, 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 3, the Company has restated its 2000 financial
statements for the classification of certain revenues.

/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
January 22, 2001, except for Notes 3 and 14,
  as to which the date is May 9, 2001

                                        32
<PAGE>   35

                       FREEMARKETS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  2000             1999
                                                              -------------    ------------
<S>                                                           <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  52,991,185    $177,204,143
  Short-term investments....................................     68,156,811      33,040,205
  Accounts receivable, net of allowance for doubtful
     accounts of $903,000 and $100,000 as of December 31,
     2000 and 1999, respectively............................     27,861,466       6,887,270
  Other current assets......................................      5,069,210       1,441,111
                                                              -------------    ------------
     Total current assets...................................    154,078,672     218,572,729
  Property and equipment, net...............................     43,713,700      12,541,404
  Goodwill and other assets, net............................    264,753,956         539,948
                                                              -------------    ------------
     Total assets...........................................  $ 462,546,328    $231,654,081
                                                              =============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   9,516,850    $  4,763,795
  Accrued incentive compensation............................     10,234,665         899,410
  Accrued acquisition costs.................................      4,676,058              --
  Other current liabilities.................................     16,890,096       2,559,462
  Short-term borrowings.....................................      3,703,071              --
  Current portion of long-term debt.........................        184,061       1,499,962
                                                              -------------    ------------
     Total current liabilities..............................     45,204,801       9,722,629
Long-term debt..............................................        543,782       3,277,716
                                                              -------------    ------------
     Total liabilities......................................     45,748,583      13,000,345
                                                              -------------    ------------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares
     authorized; zero shares issued and outstanding as of
     December 31, 2000 and 1999.............................             --              --
  Common stock, $.01 par value, 500,000,000 and 200,000,000
     shares authorized; 38,787,966 and 35,139,147 shares
     issued and outstanding as of December 31, 2000 and
     1999, respectively.....................................        387,880         351,391
  Additional capital........................................    503,064,928     244,909,299
  Unearned stock-based compensation.........................       (555,696)     (1,525,194)
  Stock purchase warrants...................................     95,484,375          30,000
  Accumulated other comprehensive loss......................       (170,848)       (110,409)
  Accumulated deficit.......................................   (181,412,894)    (25,001,351)
                                                              -------------    ------------
     Total stockholders' equity.............................    416,797,745     218,653,736
                                                              -------------    ------------
     Total liabilities and stockholders' equity.............  $ 462,546,328    $231,654,081
                                                              =============    ============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        33
<PAGE>   36

                       FREEMARKETS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                    -------------------------------------------
                                                        2000             1999           1998
                                                    -------------    ------------    ----------
<S>                                                 <C>              <C>             <C>
Revenues..........................................  $  83,338,846    $ 20,880,024    $7,801,250
                                                    -------------    ------------    ----------
Operating costs and expenses:
  Cost of revenues................................     48,896,061      12,166,097     4,258,403
  Research and development, excluding stock
     compensation.................................     19,120,783       4,912,672       841,874
  Sales and marketing, excluding stock
     compensation and warrant costs...............     41,505,610      11,938,960       656,183
  General and administrative, excluding stock
     compensation.................................     34,080,916       9,316,266     2,025,899
  Stock compensation -- research and
     development..................................        442,817         283,485            --
  Stock compensation and warrant costs -- sales
     and marketing................................      5,965,215       4,669,071            --
  Stock compensation -- general and
     administrative...............................          2,695         247,765            --
  Goodwill amortization...........................     90,748,939              --            --
  Write-off of in-process research and
     development..................................      7,396,853              --            --
                                                    -------------    ------------    ----------
  Total operating costs and expenses..............    248,159,889      43,534,316     7,782,359
                                                    -------------    ------------    ----------
     Operating (loss) income......................   (164,821,043)    (22,654,292)       18,891
  Interest and other income, net..................      8,409,500         832,883       214,856
                                                    -------------    ------------    ----------
     Net (loss) income............................  $(156,411,543)   $(21,821,409)   $  233,747
                                                    =============    ============    ==========
Earnings per share:
     Basic........................................  $       (4.21)   $      (1.46)   $      .02
                                                    =============    ============    ==========
     Diluted......................................  $       (4.21)   $      (1.46)   $      .01
                                                    =============    ============    ==========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        34
<PAGE>   37

                       FREEMARKETS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                       ACCUMULATED
                                 CONVERTIBLE                               UNEARNED        STOCK          OTHER
                                  PREFERRED     COMMON     ADDITIONAL    STOCK-BASED     PURCHASE     COMPREHENSIVE    ACCUMULATED
                                    STOCK       STOCK       CAPITAL      COMPENSATION    WARRANTS         LOSS           DEFICIT
                                 -----------   --------   ------------   ------------   -----------   -------------   -------------
<S>                              <C>           <C>        <C>            <C>            <C>           <C>             <C>
Balance at December 31, 1997...   $  37,946    $ 36,586   $  5,992,982   $        --    $   398,000     $      --     $  (3,413,689)
  Employee common stock
    purchases, net of offering
    costs of $14,173...........          --       2,600      1,283,227            --             --            --                --
  Options exercised............          --         182         20,584            --             --            --                --
  Net income...................          --          --             --            --             --            --           233,747
                                  ---------    --------   ------------   -----------    -----------     ---------     -------------
Balance at December 31, 1998...      37,946      39,368      7,296,793            --        398,000            --        (3,179,942)
  Stock purchase warrants
    exercised..................          --       8,030      1,664,845            --       (368,000)           --                --
  Issuance of Series C
    preferred stock, net of
    offering costs of
    $737,044...................       7,685          --     10,252,191            --             --            --                --
  Options exercised............          --         100         16,150            --             --            --                --
  3-for-1 stock split..........      91,261      94,996       (186,257)           --             --            --                --
  Issuance of Series D
    preferred stock, net of
    offering costs of
    $197,840...................      20,578          --     30,236,622            --             --            --                --
  Issuance of Series D stock
    purchase warrants..........          --          --             --            --      4,502,534            --                --
  Stock purchase warrants
    exercised..................       3,044          --      4,502,534            --     (4,502,534)           --                --
  Options exercised............          --       6,983      6,717,608            --             --            --                --
  Unearned stock-based
    compensation...............          --          --      2,222,981    (1,525,194)            --            --                --
  Other comprehensive loss.....          --          --             --            --             --      (110,409)               --
  Initial public offering, net
    of offering costs of
    $16,492,768................    (160,514)    201,914    182,185,832            --             --            --                --
  Net loss.....................          --          --             --            --             --            --       (21,821,409)
                                  ---------    --------   ------------   -----------    -----------     ---------     -------------
Balance at December 31, 1999...          --     351,391    244,909,299    (1,525,194)        30,000      (110,409)      (25,001,351)
  Stock purchase warrants
    exercised..................          --       1,956        133,994            --        (30,000)           --                --
  Options exercised............          --      18,121      3,999,453            --             --            --                --
  Unearned stock-based
    compensation...............          --          --        (95,177)      969,498             --            --                --
  Issuance of stock purchase
    warrants...................          --          --    (95,484,375)           --     95,484,375            --                --
  Amortization of stock
    purchase warrants,
    including $7,937,500 of
    customer fees..............          --          --     13,473,906            --             --            --                --
  Common stock issuance under
    Employee Stock Purchase
    Plan.......................          --         675      2,550,062            --             --            --                --
  Other comprehensive loss.....          --          --             --            --             --       (60,439)               --
  Common stock issued for
    purchase of iMark..........          --      15,737    333,577,766            --             --            --                --
  Net loss.....................          --          --             --            --             --            --      (156,411,543)
                                  ---------    --------   ------------   -----------    -----------     ---------     -------------
Balance at December 31, 2000...   $      --    $387,880   $503,064,928   $  (555,696)   $95,484,375     $(170,848)    $(181,412,894)
                                  =========    ========   ============   ===========    ===========     =========     =============

<CAPTION>

                                     TOTAL
                                 -------------
<S>                              <C>
Balance at December 31, 1997...  $   3,051,825
  Employee common stock
    purchases, net of offering
    costs of $14,173...........      1,285,827
  Options exercised............         20,766
  Net income...................        233,747
                                 -------------
Balance at December 31, 1998...      4,592,165
  Stock purchase warrants
    exercised..................      1,304,875
  Issuance of Series C
    preferred stock, net of
    offering costs of
    $737,044...................     10,259,876
  Options exercised............         16,250
  3-for-1 stock split..........             --
  Issuance of Series D
    preferred stock, net of
    offering costs of
    $197,840...................     30,257,200
  Issuance of Series D stock
    purchase warrants..........      4,502,534
  Stock purchase warrants
    exercised..................          3,044
  Options exercised............      6,724,591
  Unearned stock-based
    compensation...............        697,787
  Other comprehensive loss.....       (110,409)
  Initial public offering, net
    of offering costs of
    $16,492,768................    182,227,232
  Net loss.....................    (21,821,409)
                                 -------------
Balance at December 31, 1999...    218,653,736
  Stock purchase warrants
    exercised..................        105,950
  Options exercised............      4,017,574
  Unearned stock-based
    compensation...............        874,321
  Issuance of stock purchase
    warrants...................             --
  Amortization of stock
    purchase warrants,
    including $7,937,500 of
    customer fees..............     13,473,906
  Common stock issuance under
    Employee Stock Purchase
    Plan.......................      2,550,737
  Other comprehensive loss.....        (60,439)
  Common stock issued for
    purchase of iMark..........    333,593,503
  Net loss.....................   (156,411,543)
                                 -------------
Balance at December 31, 2000...  $ 416,797,745
                                 =============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        35
<PAGE>   38

                       FREEMARKETS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                     ------------------------------------------
                                                         2000            1999          1998
                                                     -------------   ------------   -----------
<S>                                                  <C>             <C>            <C>
Cash flows from operating activities:
  Net (loss) income................................  $(156,411,543)  $(21,821,409)  $   233,747
  Adjustments to reconcile net (loss) income to net
     cash used in operating activities:
     Write-off of in-process research and
       development.................................      7,396,853             --            --
     Depreciation and amortization.................      9,629,793      1,185,690       191,052
     Provision for bad debts.......................      1,367,044        172,666         5,000
     Stock compensation and warrant costs..........      6,410,727      5,200,321            --
     Goodwill amortization.........................     90,748,939             --            --
     Loss (gain) on disposal of property and
       equipment...................................      2,501,245        118,797        (3,443)
  Cash (used in) provided by changes in:
     Accounts receivable...........................    (18,914,760)    (3,120,631)   (2,883,651)
     Other assets..................................     (3,878,120)    (1,508,222)      (78,516)
     Accounts payable..............................        255,652      1,877,079       320,437
     Other liabilities.............................     20,737,493      2,010,128     1,057,983
                                                     -------------   ------------   -----------
       Net cash used in operating activities.......    (40,156,677)   (15,885,581)   (1,157,391)
                                                     -------------   ------------   -----------
  Cash flows from investing activities:
     Acquisitions, net of cash acquired............    (16,660,333)            --            --
     Purchases of short-term investments...........   (167,701,544)   (33,030,851)           --
     Maturities of short-term investments..........    132,590,112             --            --
     Capital expenditures, net.....................    (39,580,953)   (10,383,125)     (775,598)
     Patent and trademark costs....................       (179,657)      (297,593)      (83,610)
                                                     -------------   ------------   -----------
       Net cash used in investing activities.......    (91,532,375)   (43,711,569)     (859,208)
                                                     -------------   ------------   -----------
  Cash flows from financing activities:
     Proceeds from debt............................      3,703,071      6,527,910       444,000
     Repayment of debt.............................     (7,919,738)    (2,175,618)      (76,946)
     Proceeds from issuance of preferred stock,
       net.........................................             --     40,517,076            --
     Proceeds from issuance of common stock, net...      2,550,737    182,227,232     1,285,827
     Proceeds from fees applied to customer
       warrant.....................................      5,018,500             --            --
     Options and warrants exercised................      4,123,524      8,048,761        20,766
                                                     -------------   ------------   -----------
       Net cash provided by financing activities...      7,476,094    235,145,361     1,673,647
                                                     -------------   ------------   -----------
  Net change in cash and cash equivalents..........   (124,212,958)   175,548,211      (342,952)
  Cash and cash equivalents at beginning of
     period........................................    177,204,143      1,655,932     1,998,884
                                                     -------------   ------------   -----------
  Cash and cash equivalents at end of period.......  $  52,991,185   $177,204,143   $ 1,655,932
                                                     =============   ============   ===========
  Supplemental disclosure:
     Cash paid for interest........................  $     421,089   $    175,988   $    27,783
                                                     =============   ============   ===========
  Supplemental non-cash disclosure:
     Fixed asset additions included in current
       liabilities.................................  $   4,292,884   $  2,363,700   $   247,731
                                                     =============   ============   ===========
     Amounts due from customer characterized as
       payment for warrant.........................  $   2,919,000             --            --
                                                     =============   ============   ===========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        36
<PAGE>   39

                       FREEMARKETS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  DESCRIPTION OF BUSINESS

     FreeMarkets, Inc. and Subsidiaries ("the Company") creates
business-to-business online markets and provides electronic commerce technology
and services for the procurement of industrial parts, raw materials, commodities
and services. The Company's business-to-business online marketplace enables
buyers to find, screen and qualify suppliers, to negotiate prices and terms with
those suppliers through a dynamic, real-time comprehensive bidding process. The
Company's marketplace includes proprietary technology, technical operations,
market making services, access to a global database of suppliers and supplier
research, call center support to buyers and suppliers in over 30 languages and
marketplace rules that facilitate the ethical operation of the competitive
bidding process.

     In December 1999, the Company completed an IPO of 4,140,000 shares of
common stock at $48 per share. Total proceeds from the IPO were $182,227,000,
net of offering costs of $16,493,000. In connection with the IPO, all of the
Company's outstanding convertible preferred stock was automatically converted
into 16,051,438 shares of common stock.

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 five subsidiaries in Europe
and six subsidiaries in Asia and Australia. There are also five in North
America, three of which represent 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 a
maturity of three months or less at the time of purchase to be cash equivalents.

  SHORT-TERM INVESTMENTS

     As of December 31, 2000 and 1999, short-term investments primarily
consisted of commercial paper and corporate bonds. The Company classifies its
short-term 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.

     Short-term investments consisted of the following:

<TABLE>
<CAPTION>
                                   DECEMBER 31, 2000                            DECEMBER 31, 1999
                       -----------------------------------------    -----------------------------------------
                        AMORTIZED        FAIR        UNREALIZED      AMORTIZED        FAIR        UNREALIZED
                          COST           VALUE       GAIN (LOSS)       COST           VALUE       GAIN (LOSS)
                       -----------    -----------    -----------    -----------    -----------    -----------
<S>                    <C>            <C>            <C>            <C>            <C>            <C>
Commercial paper.....  $39,811,626    $39,786,824     $(24,802)     $24,580,197    $24,610,100     $ 29,903
Corporate
  obligations........   28,330,657     28,369,987       39,330        8,188,233      8,167,684      (20,549)
Other................           --             --           --          262,421        262,421           --
                       -----------    -----------     --------      -----------    -----------     --------
                       $68,142,283    $68,156,811     $ 14,528      $33,030,851    $33,040,205     $  9,354
                       ===========    ===========     ========      ===========    ===========     ========
</TABLE>

     Investment income included in interest and other income, net was
$10,137,000 in 2000, $816,000 in 1999 and $93,000 in 1998.

                                        37
<PAGE>   40
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

  FINANCIAL INSTRUMENTS

     The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair market value because of the short-term
maturity of these financial instruments. The carrying value of long-term debt
approximates fair value because the interest rates on these obligations are
comparable to the interest rates that could have been obtained at the date of
the balance sheet. The Company's short-term investments are recorded at fair
market value based on quoted market prices. Management believes the financial
risks associated with all of these financial instruments are minimal.

  PROPERTY AND EQUIPMENT

     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 external use are capitalized subsequent to the
determination of technological feasibility; this capitalization continues until
the product becomes available for general release in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". To date, the Company's software has been available for
general release concurrent with the establishment of technological feasibility
and, accordingly, no material development costs have been capitalized. 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

     The excess of costs over net assets acquired (goodwill) is being amortized
on the straight-line method over three years. Patents and trademarks are being
amortized on the straight-line method over their estimated useful lives of
seventeen years.

  IMPAIRMENT OF LONG-LIVED ASSETS

     The carrying values of long-lived assets, which include property and
equipment and goodwill and other intangible 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.

  LONG-TERM CONTRACTS

     Long-term non-cancellable executory contracts are evaluated to determine if
service costs over the life of the contract exceed revenues. If losses are
expected under such contracts, these are recorded as the service costs are
incurred.

  REVENUE RECOGNITION

     The Company recognizes revenue from fixed monthly fees for providing
services to customers ratably as those services are provided over the related
contract periods. In the case of contracts with performance incentive payments
based on auction volume and/or savings generated, as defined in the respective
contracts,

                                        38
<PAGE>   41
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

revenue is recognized as those thresholds are achieved. As discussed in Note 3,
revenue excludes fees earned under a service contract with Visteon.

     In the fourth quarter of 2000, the Company adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". There was no
impact to our consolidated financial statements.

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

<TABLE>
<S>                                                           <C>
Revenues plus fees under Visteon service contract
  characterized as payment for warrant......................  $91,276,346
Less fees under Visteon service contract characterized as
  payment for warrant.......................................    7,937,500
                                                              -----------
Revenues....................................................  $83,338,846
                                                              ===========
</TABLE>

  REVENUE AND FEE CONCENTRATION AND RELATED PARTIES

     Revenues from United Technologies were $9,014,000 in 2000 and $7,006,000 in
1999. In October 2000, the Company entered into a three-year contract extension
with United Technologies that extends through December 2003. As further
discussed in Note 10, United Technologies invested $20,938,000 in the Company in
September 1999. Amounts due from United Technologies were $2,388,000 at December
31, 2000.

     Fees from Visteon were $7,937,500 in 2000 (see Note 3). Amounts due from
Visteon were $2,919,000 at December 31, 2000.

  COST OF REVENUES

     Cost of revenues consists primarily of the expenses related to staffing and
operation of the Company's market making service organization and market
operations centers. Staffing costs include a proportional allocation of overhead
costs.

  RESEARCH AND DEVELOPMENT COSTS

     Research and development costs are expensed as incurred, and include costs
to develop, enhance and manage the Company's proprietary 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 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 $13,142,000 in 2000, $6,538,000 in
1999 and $162,000 in 1998.

  START-UP COSTS

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

                                        39
<PAGE>   42
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

  STOCK COMPENSATION

     The Company accounts for the grant of stock options to employees in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
No. 123 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 11. 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 Company
records stock compensation in the respective line items of the Consolidated
Statements of Operations. Total stock compensation was $874,000 and $698,000 for
the year ended December 31, 2000 and 1999, respectively.

  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.
Other comprehensive loss includes $66,000 and $120,000 in 2000 and 1999,
respectively, related to currency translations.

  EARNINGS PER SHARE

     The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share". Under the provisions of SFAS No. 128, 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) and upon the conversion of convertible preferred
stock (using the if-converted method). Potentially dilutive common shares are
excluded from the calculation if their effect is antidilutive.

                                        40
<PAGE>   43
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

     The computation of earnings per share is as follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                           --------------------------------------------
                                               2000             1999           1998
                                           -------------    ------------    -----------
<S>                                        <C>              <C>             <C>
Numerator:
  Net (loss) income......................  $(156,411,543)   $(21,821,409)   $   233,747
                                           =============    ============    ===========
Denominator:
  Weighted average common shares.........     37,189,440      14,914,189     11,191,670
     (Denominator for basic calculation)
  Weighted average effect of dilutive
     securities:
     Convertible preferred stock.........             --              --     11,383,800
     Stock options and warrants..........             --              --      4,201,141
                                           -------------    ------------    -----------
     Denominator for diluted
       calculation.......................     37,189,440      14,914,189     26,776,611
                                           =============    ============    ===========
  Earnings per share:
     Basic...............................  $       (4.21)   $      (1.46)   $       .02
                                           =============    ============    ===========
     Diluted.............................  $       (4.21)   $      (1.46)   $       .01
                                           =============    ============    ===========
</TABLE>

     For 2000 and 1999, potentially dilutive common shares of 10,997,006 and
21,922,820, respectively, were excluded because their effect was antidilutive.

  COMPREHENSIVE INCOME OR LOSS

     Other comprehensive loss includes net (loss) income from the consolidated
statements of operations, the net effect of foreign currency translation
adjustments and unrealized gains and losses on short-term investments.
Comprehensive loss was $156,472,000 and $21,932,000 in 2000 and 1999,
respectively, and comprehensive income was $234,000 in 1998.

  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, business-to-business
electronic commerce. 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 offices 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 and assets in 2000, 1999 and 1998 were
derived from customers whose headquarters are located in the United States.

                                        41
<PAGE>   44
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

  RECLASSIFICATION

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

  RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133, which is effective for all
quarters beginning January 1, 2001, establishes accounting and reporting
standards for derivative financial instruments and hedging activities related to
those instruments. The adoption of this standard did not have a material impact
on the Company's consolidated financial statements.

NOTE 3.  REISSUANCE OF 2000 FINANCIAL STATEMENTS

     A recent review of the Company's 2000 Form 10-K by the Securities and
Exchange Commission staff included the accounting related to the issuance of a
warrant in 2000 to Visteon and a related service contract. As a result of this
review, the Company has determined that it must first allocate the fees it earns
from Visteon under the service contract as payment for the warrant as follows:

<TABLE>
<S>                                                           <C>
Fees under Visteon service contract.........................  $ 7,937,500
Less required characterization as payment for warrant.......   (7,937,500)
                                                              -----------
Revenues from Visteon service contract......................  $        --
                                                              ===========
</TABLE>

     Accordingly, the reissued 2000 financial statements reclassify $7,937,500
from stock compensation and warrant costs -- sales and marketing to a reduction
of revenues. The remaining warrant amortization of $5,536,000 in excess of the
fees earned from Visteon in 2000 remains in stock compensation and warrant
costs -- sales and marketing. The $82,010,000 unamortized value of the warrant
will be amortized over the remainder of the five-year term of the service
contract. This amortization will first be allocated to a reduction of the
revenues that the Company would otherwise have earned under the service contract
had it not granted the warrant, and any remaining portion will be allocated to
stock compensation and warrant costs -- sales and marketing. This
reclassification has no effect on net income. In addition, due to this
reclassification, cash flows from operating activities and financing activities
have changed accordingly.

     As a result of the above, the Company has restated the following line items
in the consolidated financial statements:

<TABLE>
<CAPTION>
                                                         AS PREVIOUSLY
                                                            REPORTED      AS RESTATED
                                                         --------------   -----------
<S>                                                      <C>              <C>
Revenues...............................................   $91,276,346     $83,338,846
Stock compensation and warrant costs -- sales and
  marketing............................................    13,902,715       5,965,215
Cash flows used in operating activities................    35,138,177      40,156,677
Cash flows provided by financing activities............     2,457,594       7,476,094
</TABLE>

NOTE 4.  ACQUISITIONS

     In March 2000, the Company acquired iMark, a business-to-business online
marketplace for surplus equipment and inventory. The Company issued 1,573,725
shares of its common stock and assumed 176,275 options with an aggregate total
value of $333,594,000, in exchange for all of the outstanding shares and options
of iMark. The acquisition was accounted for as a purchase business combination,
and the purchase price was $339,684,000, including estimated transaction costs
of $6,000,000. The accrued acquisition costs at

                                        42
<PAGE>   45
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4.  ACQUISITIONS, CONTINUED:

December 31, 2000 consist primarily of $4,000,000 in fees that are under
negotiation and are expected to be settled in 2001. The purchase price was
allocated as follows:

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

     At the time of the acquisition of iMark, there was one in-process research
and development project. The software applications resulting from this
development project have subsequently been integrated into our products. The
efforts required to complete the acquired in-process research and development
project included the completion of all planning, designing and testing
activities that were necessary to establish that the product can be produced to
meet its design requirements, including functions, features and technical
performance requirements. The value of the acquired in-process research and
development was computed using a discount rate of 34% on the anticipated cash
flow stream from sales of the related product revenues, less the estimated costs
to complete the development efforts. At the time of the acquisition, the product
was approximately 70% complete. The majority of the costs to complete the
project were incurred in 2000, and the remaining costs are not material. The
value assigned to the in-process research and development was $7,397,000, and
was charged to expense during the first quarter of 2000 when the acquisition was
consummated.

     Also in March 2000, the Company purchased substantially all of the assets
of Surplus Record, Inc. and SR Auction, Inc. (collectively, "Surplus Record")
for $18,000,000 in cash. Surplus Record consists of a directory and network of
dealers and buyers and an online surplus asset trade site for business surplus,
new and used industrial equipment, machinery and machine tools. The acquisition
was accounted for as a purchase business combination, and the excess of the
purchase price over the fair value of the net assets acquired of $17,942,000 was
allocated to goodwill, which is being amortized on a straight-line basis over 36
months.

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

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

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        ------------------------------
                                                            2000             1999
                                                        -------------    -------------
                                                                 (UNAUDITED)
<S>                                                     <C>              <C>
Revenues..............................................  $  84,160,459    $  24,090,397
Goodwill amortization.................................    118,091,841      118,091,841
Net loss..............................................   (182,997,853)    (145,534,440)
Basic and diluted earnings per share..................          (4.72)           (8.83)
</TABLE>

                                        43
<PAGE>   46
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5.  PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               2000           1999
                                                            -----------    -----------
<S>                                                         <C>            <C>
Computer and office equipment (2 to 5 years)..............  $25,466,600    $ 7,231,574
Furniture and fixtures (5 years)..........................    4,838,770      2,254,839
Leasehold improvements (5 years)..........................   12,477,840      2,426,514
Software and development costs (3 years)..................    8,339,598      1,988,482
                                                            -----------    -----------
                                                             51,122,808     13,901,409
Less accumulated depreciation.............................    7,409,108      1,360,005
                                                            -----------    -----------
                                                            $43,713,700    $12,541,404
                                                            ===========    ===========
</TABLE>

     Depreciation expense was $9,585,000 in 2000, $1,145,000 in 1999 and
$142,000 in 1998. As a result of a change in certain information technology
initiatives and our transition to a globally-integrated ERP, the Company
recognized additional depreciation and other charges of $2,037,000.

NOTE 6.  GOODWILL AND OTHER ASSETS

     Goodwill and other assets (and their related useful lives) consisted of the
following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             ------------------------
                                                                 2000          1999
                                                             ------------    --------
<S>                                                          <C>             <C>
Goodwill (3 years).........................................  $354,275,972    $     --
Other (17 years)...........................................     1,271,474     555,206
                                                             ------------    --------
                                                              355,547,446     555,206
Less accumulated amortization..............................    90,793,490      15,258
                                                             ------------    --------
                                                             $264,753,956    $539,948
                                                             ============    ========
</TABLE>

     Other is primarily comprised of patent and trademark costs.

NOTE 7.  DEBT

     Debt consisted of the following:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 2000          1999
                                                              ----------    ----------
<S>                                                           <C>           <C>
(A) Revolver................................................  $3,703,071    $       --
(A) Equipment term note.....................................          --     1,777,678
(A) Equipment term note #2..................................          --     3,000,000
(B) Equipment term note #3..................................     574,790            --
     Other..................................................     153,053            --
                                                              ----------    ----------
                                                               4,430,914     4,777,678
     Less current portion...................................   3,887,132     1,499,962
                                                              ----------    ----------
                                                              $  543,782    $3,277,716
                                                              ==========    ==========
</TABLE>

                                        44
<PAGE>   47
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7.  DEBT, CONTINUED:

(A) In November 2000, the Company entered into a one-year Revolving Credit
    Facility (the "Revolving Credit Facility") with a maximum borrowing base of
    $25.0 million. At December 31, 2000, $16.2 million as available based on
    eligible accounts receivable. The Revolving Credit Facility bears interest
    at the lender's prime rate, which was 9.5% at December 31, 2000. The
    Revolving Credit facility was used to replace the Equipment Term Note and
    the Equipment Term Note #2. These notes were part of a $10.0 million
    facility, which also included a $5.0 million line of credit.

(B) In connection with the acquisition of iMark, the Company assumed an
    Equipment Term Note ("Equipment Term Note #3). The Equipment Term Note #3
    bears interest at a rate of 8% and is payable in 48 monthly installments
    through January 2004.

     The Revolving Credit Facility contains restrictive covenants, including a
limitation on incurring additional indebtedness and paying dividends. The
Company is also required to satisfy minimum tangible net worth and current and
debt service ratios each month, 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 $478,000 in 2000, $176,000 in 1999 and $28,000 in
1998. The weighted average interest rate was 9.9% in 2000, 6.7% in 1999 and 6.9%
in 1998.

     Scheduled maturities of debt for each of the years ending December 31 are
as follows:

<TABLE>
<S>                                                           <C>
2001........................................................  $3,887,132
2002........................................................     201,012
2003........................................................     219,570
2004........................................................     123,200
                                                              ----------
                                                              $4,430,914
                                                              ==========
</TABLE>

NOTE 8.  COMMITMENTS AND CONTINGENCIES

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

     Operating lease rental expense amounted to $4,488,000 in 2000, $960,000 in
1999 and $280,000 in 1998. The following is a schedule of future minimum lease
payments under all operating leases through December 31 of each of the following
years:

<TABLE>
<S>                                                           <C>
2001........................................................  $ 5,832,000
2002........................................................    5,459,000
2003........................................................    5,078,000
2004........................................................    4,772,000
2005........................................................    4,673,000
Thereafter..................................................   20,686,000
</TABLE>

     Under the Visteon service contract, the Company expects to incur
approximately $19 million in direct costs over the remaining life of the
contract.

     The Company is subject to various 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,

                                        45
<PAGE>   48
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8.  COMMITMENTS AND CONTINGENCIES, CONTINUED:
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 consolidated financial position.

NOTE 9.  INCOME TAXES

     The Company had no income tax provision in 2000 and 1999 since the Company
had a net taxable loss in each of those periods. Deferred tax assets and
liabilities consisted of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2000           1999
                                                             -----------    ----------
<S>                                                          <C>            <C>
Net operating losses.......................................  $33,550,000    $8,202,000
Research and experimentation credits.......................    1,292,000       395,000
Deferred stock-based expense...............................    2,270,000     1,942,000
Goodwill...................................................    1,395,000            --
Depreciation and other.....................................     (236,000)     (797,000)
                                                             -----------    ----------
Net deferred tax assets....................................   38,271,000     9,742,000
Less valuation allowance...................................  (38,271,000)   (9,742,000)
                                                             -----------    ----------
                                                             $        --    $       --
                                                             ===========    ==========
</TABLE>

     In assessing the realizability of net deferred tax assets, management
considers whether it is more likely than not that some portion of the net
deferred tax assets will not be realized. The ultimate realization of net
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future
deductible amounts become deductible. Management has established a full
valuation allowance against the net deferred tax assets at December 31, 2000 and
December 31, 1999 since the realization of these assets in future periods is
uncertain.

     As of December 31, 2000, the Company had available federal and state net
operating loss carryforwards of approximately $83,874,000. These net operating
loss carryforwards may be used to offset future federal and state income taxes
through 2020 and 2010, respectively. As a result of the Series B convertible
preferred stock offering in December 1996 and concurrent ownership change,
Section 382 of the Internal Revenue Code limits the federal net operating losses
incurred prior to December 1996, which amounted to $2,245,000, available to the
Company to $441,000 per year. Any unused annual limitation may be carried
forward to future years for the balance of the federal net operating loss
carryforward period. In addition, the Company has research and experimentation
credit carryforwards available to offset future federal tax liabilities through
2020.

                                        46
<PAGE>   49
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10.  STOCKHOLDERS' EQUITY

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

<TABLE>
<CAPTION>
                                               CONVERTIBLE        COMMON      STOCK PURCHASE
                                             PREFERRED STOCK      STOCK          WARRANTS
                                             ---------------    ----------    --------------
<S>                                          <C>                <C>           <C>
Outstanding at December 31, 1997...........     11,383,800      10,975,799       2,604,600
  Shares issued............................             --         780,000              --
  Options exercised........................             --          54,600              --
                                               -----------      ----------      ----------
Outstanding at December 31, 1998...........     11,383,800      11,810,399       2,604,600
  Shares issued............................      4,363,207       4,140,000              --
  Stock purchase warrants issued...........             --              --         304,431
  Stock purchase warrants exercised........        304,431       2,409,000      (2,713,431)
  Options exercised........................             --         728,310              --
  Conversion of preferred stock............    (16,051,438)     16,051,438              --
                                               -----------      ----------      ----------
Outstanding at December 31, 1999...........             --      35,139,147         195,600
  Shares issued............................             --       1,641,076
  Stock purchase warrants issued...........             --              --       1,750,000
  Stock purchase warrants exercised........             --         195,600        (195,600)
  Options exercised........................             --       1,812,143              --
                                               -----------      ----------      ----------
Outstanding at December 31, 2000...........             --      38,787,966       1,750,000
                                               ===========      ==========      ==========
</TABLE>

  STOCK SPLITS

     In January 1998, the Company's Board of Directors declared a 200-for-1
stock split in the form of a stock dividend for the then-outstanding shares of
common stock and preferred stock. In June 1999, the Company's Board of Directors
declared a 3-for-1 stock split in the form of a stock dividend for the
then-outstanding shares of common stock and preferred stock.

     The Company has presented each split as a separate issuance of shares
occurring at the time of the split. Accordingly, share amounts presented in the
consolidated balance sheets and statements of stockholders' equity reflect the
actual shares outstanding for each period presented prior to the stock splits.
All references to the number of shares and per share amounts elsewhere in the
consolidated financial statements and related notes have been restated to
reflect both stock splits.

  PREFERRED STOCK

     In April 1999, the Company completed an offering of 2,305,434 shares of
Series C convertible preferred stock at $4.77 per share. Total proceeds from the
offering were $10,260,000, net of offering costs of $737,000.

     In September 1999, the Company completed an offering of 2,057,773 shares of
Series D convertible preferred stock at $14.80 per share, of which 1,414,552
shares were purchased by United Technologies. Proceeds from the offering were
$30,257,000, net of offering costs of $198,000. In addition, the Company granted
304,431 stock purchases warrants ("Series D warrants") at an exercise price of
$.01 per share to United Technologies in exchange for release of restrictions
that limited the Company from serving certain competitors of United
Technologies. In connection with this grant, the Company recognized warrant
costs of $4,503,000 in September 1999, as determined using the Black-Scholes
pricing model. United Technologies exercised the Series D warrants in September
1999, resulting in total proceeds of $3,000 and a $4,503,000 transfer from stock
purchase warrants to additional capital.

                                        47
<PAGE>   50
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10.  STOCKHOLDERS' EQUITY, CONTINUED:

     As discussed in Note 1, all of the Company's outstanding convertible
preferred stock automatically converted into 16,051,438 shares of common stock
in connection with the IPO. Additionally, the Company's Board of Directors has
the authority, without further action by the stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences, privileges and restrictions of each series.

  COMMON STOCK

     In 1998, employees purchased 780,000 shares of common stock at $1.67 per
share under a qualified stock purchase plan (the "1998 Purchase Plan"),
resulting in total proceeds of $1,286,000, net of offering costs of $14,000. No
further shares may be purchased under the 1998 Purchase Plan.

     As discussed in Note 1, the Company completed an IPO of 4,140,000 shares of
common stock at $48 per share in December 1999.

  STOCK PURCHASE WARRANTS

     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 services and access to the Company's business-to-business
eMarketplace 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 1,750,000 shares of the Company's common stock. The
Company receives marketing and public relations benefits as a result of its
relationship with Visteon. The warrant was valued at $95,484,000 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 $13,474,000 was
amortized in 2000. This amortization has been reclassified as a reduction to
revenues to the extent of the $7,937,500 in fees earned from Visteon, and the
remaining $5,536,000 as stock compensation and warrant costs -- sales and
marketing.

NOTE 11.  EMPLOYEE BENEFIT PLANS

  401(k) SAVINGS PLAN

     In January 1999, the Company adopted 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 has made no contributions since its inception.

  EMPLOYEE STOCK PURCHASE PLAN

     In 1999, the Board of Directors adopted, and the stockholders of the
Company approved, the Company's Amended and Restated Employee Stock Purchase
Plan (the "1999 Purchase Plan"), under which 500,000 shares have been reserved
for issuance, subject to increases as provided in the 1999 Purchase Plan. The
1999 Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. Under the 1999 Purchase Plan, 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 will be 85% of the lowest fair
value at certain dates defined in the 1999 Purchase Plan. The 1999 Purchase Plan
became effective in December 1999.

                                        48
<PAGE>   51
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11.  EMPLOYEE BENEFIT PLANS, CONTINUED:

  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.

     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 add certain change-of-control provisions, as well as make
other minor modifications. As of December 31, 2000, 15,450,000 stock options
were authorized for issuance, of which 2,341,380 remained available for future
issuance.

     The following is a summary of stock option activity:

<TABLE>
<CAPTION>
                                                            NUMBER      WEIGHTED AVERAGE
                                                          OF OPTIONS     EXERCISE PRICE
                                                          ----------    ----------------
<S>                                                       <C>           <C>
Outstanding at December 31, 1997........................   1,062,600         $0.47
  Granted...............................................   6,150,900          1.06
  Forfeited.............................................     (44,700)         0.55
  Exercised.............................................     (54,600)         0.38
                                                          ----------
Outstanding at December 31, 1998........................   7,114,200          0.98
  Granted...............................................   5,426,300         10.69
  Forfeited.............................................    (204,800)         3.31
  Exercised.............................................    (728,310)         9.25
                                                          ----------
Outstanding at December 31, 1999........................  11,607,390          4.96
  Granted...............................................   2,325,345         61.25
  Assumed...............................................     176,275          6.02
  Forfeited.............................................  (1,691,654)         9.57
  Exercised.............................................  (1,812,143)         2.22
                                                          ----------
Outstanding at December 31, 2000........................  10,605,213         17.36
                                                          ==========
Shares exercisable as of December 31, 2000..............   1,948,475          4.89
</TABLE>

                                        49
<PAGE>   52
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11.  EMPLOYEE BENEFIT PLANS, CONTINUED:

     The following is a summary of the options outstanding as of December 31,
2000:

<TABLE>
<CAPTION>
                            RANGE 1      RANGE 2      RANGE 3       RANGE 4        RANGE 5         RANGE 6           TOTAL
                          -----------   ---------   -----------   -----------   -------------   --------------   -------------
<S>                       <C>           <C>         <C>           <C>           <C>             <C>              <C>
Range of exercise
  prices................  $0.07-$0.80   $    1.08   $1.59-$1.67   $2.50-$4.77   $12.50-$40.69   $41.00-$341.88   $0. 07-$341.88
Weighted average
  exercise price........         0.53        1.08          1.67          4.72           18.26            70.68           17.36
Weighted average
  contractual life (in
  years)................          6.8         7.4           7.8           8.3             8.8              9.3             8.2
Exercisable.............      697,324     452,600       153,225       150,165         482,661           12,500       1,948,475
Outstanding.............    1,392,547   2,477,000       812,022     1,408,365       2,794,360        1,720,919      10,605,213
</TABLE>

     All options were granted at exercise prices determined by the Board of
Directors. In 1999, the Company recorded $1,976,000 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 $414,000 and $451,000 was amortized in 2000 and 1999, respectively.

     If compensation costs had been recognized pursuant to SFAS No. 123, the
Company's net (loss) income and earnings per share would have been as follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                            ------------------------------------------
                                                2000             1999          1998
                                            -------------    ------------    ---------
<S>                                         <C>              <C>             <C>
Net (loss) income:
  As reported.............................  $(156,411,543)   $(21,821,409)   $ 233,747
  Pro forma...............................   (205,413,339)    (25,390,296)    (208,581)
Earnings per share:
  Basic:
     As reported..........................  $       (4.21)   $      (1.46)   $     .02
     Pro forma............................          (5.52)          (1.70)        (.02)
  Diluted:
     As reported..........................  $       (4.21)   $      (1.46)         .01
     Pro forma............................          (5.52)          (1.70)        (.02)
</TABLE>

     The weighted average fair value per option grant to employees was $57.49 in
2000, $4.05 in 1999 and $.23 in 1998. The fair value of each option grant was
determined using the minimum value method prior to the IPO and using the
Black-Scholes pricing model subsequent to the IPO with the following assumptions
for all grants:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------    -----    -----
<S>                                                           <C>       <C>      <C>
Weighted average risk-free interest rate....................    6.5%     5.3%     5.0%
Expected life (number of years).............................      5        5        5
Volatility..................................................  146.1%     100%      --
</TABLE>

     In October 1999, 30,000 options were granted to the Company's Assistant
Secretary, who is neither an employee nor a director. In accordance with SFAS
No. 123, the Company recorded stock compensation of $246,000, as determined
using the Black-Scholes pricing model with the following assumptions: weighted
average risk-free interest rate of 6.0%, expected life of three years and
volatility of 80%.

                                        50
<PAGE>   53
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11.  EMPLOYEE BENEFIT PLANS, CONTINUED:

     In April 2000, 3,000 options were granted to a consultant. In accordance
with SFAS No. 123, the Company recorded unearned stock compensation of $196,000,
of which $147,000 was amortized in 2000, as determined using the Black-Scholes
pricing model with the following assumptions: weighted average risk-free
interest rate of 6.2%, expected life of one year and volatility of 125%.

NOTE 12.  SECURITIES CLASS ACTION COMPLAINT

     Ten securities fraud class action complaints were filed against the Company
and three executive officers in federal court in Pittsburgh, Pennsylvania, which
the court consolidated into a single proceeding. The plaintiffs alleged that the
Company and the other defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Company and the individual defendants moved
to dismiss the case on the grounds that the plaintiffs failed to allege facts
sufficient to support their claim that the defendants violated the securities
laws. On December 27, 2000, the court granted the motion to dismiss, having
concluded that the plaintiffs' complaint was legally deficient. The court
granted the plaintiffs leave to amend their complaint.

NOTE 13.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The Company's quarterly results for 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                               FIRST          SECOND         THIRD          FOURTH
2000:                         QUARTER        QUARTER        QUARTER        QUARTER          TOTAL
-----                       ------------   ------------   ------------   ------------   -------------
<S>                         <C>            <C>            <C>            <C>            <C>
Revenues(1)...............  $ 10,808,039   $ 17,061,764   $ 23,771,798   $ 31,697,245   $  83,338,846
Net loss..................   (18,137,239)   (46,522,141)   (47,132,150)   (44,620,013)   (156,411,543)
Earnings per share:
  Basic and diluted.......          (.51)         (1.25)         (1.25)         (1.17)          (4.21)
</TABLE>

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

(1) Excludes service fees from Visteon of $2,312,500 for the second quarter and
    $2,812,500 for the third and fourth quarters, respectively.

<TABLE>
<CAPTION>
                               FIRST          SECOND         THIRD          FOURTH
1999:                         QUARTER        QUARTER        QUARTER        QUARTER          TOTAL
-----                       ------------   ------------   ------------   ------------   -------------
<S>                         <C>            <C>            <C>            <C>            <C>
Revenues..................  $  3,498,705   $  4,183,294   $  5,355,298   $  7,842,727   $  20,880,024
Gross profit..............     1,933,381      1,599,758      2,137,079      3,043,709       8,713,927
Net loss..................      (492,166)    (3,264,928)    (9,722,382)    (8,341,933)    (21,821,409)
Earnings per share:
  Basic and diluted.......          (.04)          (.23)          (.68)          (.43)          (1.46)
</TABLE>

NOTE 14.  SUBSEQUENT EVENTS

     In February 2001, the Company entered into a definitive agreement to
acquire Adexa, Inc., a leading provider of software products that enable
collaborative commerce. Under this agreement, the Company will issue up to
17,250,000 shares of its common stock and options in exchange for all
outstanding equity interests of Adexa. The merger will be accounted for as a
purchase, and is expected to close in the second quarter of 2001.

     Also in February 2001, the court dismissed the securities class action
complaint discussed in Note 12 with prejudice pursuant to a stipulation of
voluntary dismissal executed by all parties. The case is now closed.

     Since April 27, 2001, five 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

                                        51
<PAGE>   54
                       FREEMARKETS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14.  SUBSEQUENT EVENTS, CONTINUED:

same claims, stem from the Company's announcement on April 23, 2001 that, as a
result of ongoing discussions with the staff of 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.
The Company and the individual defendants believe that the plaintiffs'
allegations are completely without merit and they intend to defend these claims
vigorously.

                                        52
<PAGE>   55

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Previously filed in Form 10-K/A (Amendment No. 1), as filed with the SEC on
April 30, 2001.

ITEM 11.  EXECUTIVE COMPENSATION

     Previously filed in Form 10-K/A (Amendment No. 1), as filed with the SEC on
April 30, 2001.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Previously filed in Form 10-K/A (Amendment No. 1), as filed with the SEC on
April 30, 2001.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Previously filed in Form 10-K/A (Amendment No. 1), as filed with the SEC on
April 30, 2001.

                                        53
<PAGE>   56

                                    PART IV

ITEM 14. 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:

<TABLE>
<S>                                                           <C>
Report of Independent Accountants...........................   32

Consolidated Balance Sheets as of December 31, 2000 and
  1999......................................................   33

Consolidated Statements of Operations for each of the three
  years in the period ended December 31, 2000...............   34

Consolidated Statements of Stockholders' Equity for each of
  the three years in the period ended December 31, 2000.....   35

Consolidated Statements of Cash Flows for each of the three
  years in the period ended December 31, 2000...............   36

Notes to Consolidated Financial Statements..................   37
</TABLE>

     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.

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                           DESCRIPTION
-------                           -----------
<S>       <C>
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)
4.1(b)    Second Amended and Restated Registration Rights Agreement
          dated as of March 23, 2000. (3)
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. *
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)
10.3(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. *
10.3(b)   First Amendment to Credit Agreement dated as of December 8,
          2000 by and among the registrant, the banks party thereto,
          Silicon Valley Bank, as syndication agent, and PNC Bank,
          National Association, as administrative agent. *
10.4      Registrant's 1996 Stock Incentive Plan. (4)
10.5      Registrant's Amended and Restated Stock Incentive Plan. (6)
10.6      Registrant's Amended and Restated Employee Stock Purchase
          Plan. (7)
</TABLE>

                                        54
<PAGE>   57

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                           DESCRIPTION
-------                           -----------
<S>       <C>
10.7      Form of Indemnification Agreement between the registrant and
          each of its directors and officers. (8)
10.8      Restricted Stock Purchase Agreement between Thomas J.
          Meredith and the registrant dated as of November 23, 1999.
          (9)
10.9++    Long Term Access and Services Agreement dated as of April
          17, 2000 by and between the registrant and Visteon
          Corporation. (2)
10.10     Common Stock Purchase Warrant of the registrant issued to
          Visteon Corporation dated April 17, 2000. (2)
21.1      Subsidiaries of the registrant. (7)
23.1      Consent of PricewaterhouseCoopers LLP.
</TABLE>

---------------
* Previously filed.

 ++  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 Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2000, as filed with the
    SEC on August 2, 2000.

(3) Incorporated by reference to exhibit filed with the registrant's Quarterly
    Report on Form 10-Q for the quarter ended March 31, 2000, as filed with the
    SEC on May 10, 2000.

(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 Amendment No. 1 to the
    Registration Statement, as filed with the SEC on October 15, 1999.

(7) 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.

(8) Incorporated by reference to exhibit filed with Amendment No. 5 to the
    Registration Statement, as filed with the SEC on November 18, 1999.

(9) Incorporated by reference to exhibit filed with Amendment No. 6 to the
    Registration Statement, as filed with the SEC on November 23, 1999.

(b) REPORTS ON FORM 8-K

     The Company did not file any Reports on Form 8-K during the quarter ended
December 31, 2000.

                                  * * * * * *

                                        55
<PAGE>   58

                                   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: May 9, 2001                        By: /s/ JOAN S. HOOPER
                                            ------------------------------------
                                            Joan S. Hooper
                                            Senior Vice President and
                                            Chief Financial Officer

                                        56
<PAGE>   59

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                               DESCRIPTION
-------                              -----------
<C>          <S>

  23.1       Consent of PricewaterhouseCoopers LLP.
</TABLE>
<PAGE>   60

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

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

Our audits of the consolidated financial statements referred to in our report
dated January 22, 2001, except for Notes 3 and 14 as to which the date is May 9,
2001, appearing in this Form 10-K also included an audit of the financial
statement schedule listed in Item 14(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
January 22, 2001, except for Notes 3 and 14, as to
  which the date is May 9, 2001
<PAGE>   61

                 SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
             COLUMN A                COLUMN B     COLUMN C     COLUMN D     COLUMN E     COLUMN F
----------------------------------  ----------   ----------   ----------   ----------   -----------
                                                        ADDITIONS
                                                 -----------------------
                                    BALANCE AT                CHARGED TO                BALANCE AT
                                    BEGINNING    CHARGED TO     OTHER                     END OF
                                    OF PERIOD     EXPENSE      ACCOUNTS    DEDUCTIONS     PERIOD
                                    ----------   ----------   ----------   ----------   -----------
<S>                                 <C>          <C>          <C>          <C>          <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
  Year ended December 31, 2000....  $  100,000   $1,367,044   $       --   $(564,044)   $   903,000
  Year ended December 31, 1999....      25,000      172,666           --     (97,666)       100,000
  Year ended December 31, 1998....      20,000        5,000           --          --         25,000
ALLOWANCE FOR DEFERRED TAX ASSETS:
  Year ended December 31, 2000....   9,742,000           --   28,529,000          --     38,271,000
  Year ended December 31, 1999....   1,337,000           --    8,405,000          --      9,742,000
  Year ended December 31, 1998....   1,336,000           --        1,000          --      1,337,000
</TABLE>